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Financial Statements without adjustment
Financial Statements record the summary of financial activities and the position of a business.
They are used to present financial information in a structured manner for users of accounts to
understand.
They use information from the trial balance.
Financial Statements for Sole Trader
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Income Statement (Previously known as Trading and Profit and Loss Account)
Statement of Financial Position (Previously known as Balance Sheet)
1. Income Statement
 It is prepared to calculate the profit or loss made by a business
 Revenues/Income – Expenses/Cost = Profit/ Loss
Income Statement
Trading A/C
Profit and Loss A/C
Gross Profit = Sales/Revenue – Cost of Sales
Gross Profit + Other Income - Expenses = Profit/Loss for the year
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2. Statement of Financial Position (SOFP)
 It was previously known as “ Balance sheet”
 It is normally prepared according to the accounting equation
 It extends the accounting equation
Assets = Capital + Liabilities
Non- Current Liabilities
Non – Current Assets
Tangible NCA
Current Assets
Current Liabilities
Intangible NCA
Assets
 They are items that are owned and controlled by the business or items owed to a business.
 They are financial resources of a business from which economic benefits will be derived
 They can be categorized into:
1. Non- Current Assets
2. Current Assets
Non- Current Assets
 These are assets which have been purchased for long term use in the business. ( for more than one
financial year)
 They are resources from which a business will obtain economic benefits over several accounting
periods
 They help the business to operate and to generate revenue and profit.
 They are not bought for resale
 Examples:
1. Motor Vehicles/ Delivery vehicles/ Motor Van
2. Property/ Premises
3. Land and building
4. Fixtures and fittings
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5. Equipment
6. Furniture
7. Computers
8. Plant and machinery
9. Goodwill (reputation of a business)
 There are two types of Non- Current Assets namely:
1. Tangible NCA: they have a presence in the business. They have a physical substance,
that is they can be seen and touched
2. Intangible NCA: despite they don’t have presence in the business they do help the
business to operate and generate benefits. These assets can neither be seen nor
touched. Examples: Goodwill (reputation), Patent, Trade mark, Copyrights, Computer
software
Goodwill
 It refers to the good reputation and profitability of a business which enable it to earn future profits.
 It arises from:
a) Management skills or know-how
b) Reputation for services and quality of goods
c) Flavourable locations of a business
d) Good public reputation
Current Assets
 These are assets that can be normally converted into cash in less than one financial year.
 They are assets which are normally present in the business for less than one financial year.
 Examples:
1. Closing inventory
2. Trade receivables ( Credit customer/ Debtor)
3. Cash at bank
4. Cash in hand
5. Petty Cash
Liabilities
 They normally refer to the amount owed by the business.
 They represent an obligation that the business has to fulfill.
 They are normally an obligation arising as a result of past events and where the settlement is
expected to result in an outflow of resources.
 Examples: Loan taken from the bank/ Amount owed to suppliers ( trade payables)
 They are normally classified into:
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1. Non- Current Liabilities
2. Current Liabilities
Non- Current Liabilities
 These are the amounts which are being owed by the business for more than one financial year.
 Example: Long term loan taken from the bank.
Current Liabilities
 These are the amounts that are being owed for less than one financial year. The business has to
repay the debt in less than one financial year.
 Examples:
1. Amount owed by suppliers: Trade Payables
2. Short term loan repayable in less than one financial year.
3. Bank overdraft
Equity
 It is also known as capital
 It refers funds invested by the owner in the business
 It increases with profit and additional capital and decreases with losses and drawings