PREPARATION OF FINANCIAL STATEMENTS OF A SOLE TRADER

The final accounts of the enterprise comprises of the Statement of Profit or Loss and Statement of Financial
Position/Balance Sheet. These financial statements must be prepared at least once per year.

THE STATEMENT OF PROFIT OR LOSS

The objective of the business is to make a profit. The statement of profit or loss is prepared for the accounting
period at the end of the period, to determine the profit or loss made by the enterprise during that period. It is
prepared on the principle of the Accruals or matching concept.
The first section of the statement of profit or loss is for the trader, this will reflect the GROSS PROFIT made on
trading. In this section of the statement of profit or loss the selling price is matched against the cost price. Net
Sales – Cost of Goods Sold = Gross Profit

In the second section of the statement of profit or loss expenses are matched against the gross profit plus other
revenues to determine the profit or loss for the period. If gross profit plus other revenues exceed expenses a net
profit is earned and is expenses exceed gross profit plus other revenues a loss is incurred. Gross profit + other
revenue – Other expenses = Profit/Loss
XYZ Ltd
Statement of Profit or Loss for the year ended …
$ $ $
Sales XXX
Less sales returns/return inwards (XXX)
Less discounts allowed (XXX)

Net sales XXX

Less Cost of Goods Sold
Opening inventory XXX
Add Purchases XXX
Add carriage inwards XXX
Less purchases returns/return outwards (XXX)
Less discounts received (XXX)
Less goods consumed by owner (XXX)
Net Purchases XXX
Cost of goods available for sale XXX
Less closing inventory (XXX)
(XXX)
Gross Profit XXX
Other revenue
Rent received XXX
Commission received etc., XXX
XXX
Total Revenue XXX
Other expenses
Insurance XXX
Rent XXX
Carriage outwards etc., XXX
(XXX)
Net Profit/(Loss) XXX

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Under the matching or accruals concept is critical to remember that:

Expenses are applied to the statement of profit or loss based on when they were incurred and not when they are
paid. This means that if an expense in 2016 but paid in 2017, the correct time period to charge the expense is
2016. This is done by accruing the expense.

Revenues are applied to the statement of profit or loss based on when they were earned and not when they are
received. A telephone charge cost was incurred in 2016 to James Ltd; in 2017 James Ltd pays the bill for 2016.
The telephone company should record the bill as revenue in 2016 as this was the year in which the revenue was
earned. This is done by accruing the revenue.

Expenses and revenues can either be prepaid or accrued. The matching concept and its implication for the end
of year adjustments will be examined in detail later.

THE STATEMENT OF FINANCIAL POSITION/BALANCE SHEET

The statement of financial position/balance sheet shows the assets and liabilities of an enterprise at a particular
date. The statement of profit or loss is for a particular period where as the statement of financial position is at a
particular date. It is in this statement that the assets, liabilities and equity are maintained.

Assets on the Statement of Financial Position

Based on the IAS assets are classified under two broad headings:

 Non Current Assets

 Current Assets
Non Current Assets

Non-current assets can be defined as assets which are expected to remain in the business for over one
accounting year. In other words these assets were acquired for long term use and not for trading. Non-current
assets may include tangible and intangible assets.

Examples: Land and Building, Machinery and equipment, Furniture and Fittings, Copy rights and Motor
Vehicles.

Current Assets

An asset should be classified as a current asset when it:

a) Is expected to be realized in, or is held for sale or consumption in the normal course of the enterprise’s
operating cycle; or
b) is held primarily for trading purposes or for the short term and expected to be realized within twelve
months of the statement of financial position date; or
c) is cash or a cash equivalent asset which is not restricted in its use

All other assets should be classified as non-current assets

Examples include: inventory, trade receivables/debtors, and cash in hand and at bank, prepaidexpenses.

All assets are generally arranged in order of permanence of liquidity; starting with the most permanent or least
liquid down to the least permanent of the most liquid.
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Liabilities on the Statement of Financial Position
Liabilities are classified on the statement of financial position under two broad headings also:
 Current liabilities
 Non Current liabilities

Current liability
A liability should be classified as a current liability when it:
a) Is expected to settled in the normal course of enterprise’s operating cycle;
b) Is due to be settled within twelve months of the statement of financial position date
All other liabilities should be classified as non-current liabilities. Examples include: bank overdrafts, trade
accounts payable/creditors, income taxes, and accrued expenses.

Non-Current liability
Non-current liabilities can be defined as liabilities which are expected to be settled after more than accounting
year.Examples include: Loans, mortgages and debentures.

Owner’ Equity
This section of the statement of financial position shows the amount that can be claimed by the owner of the
business. It consists of the capital invested plus the amount of net profit or loss, less any amount for
drawings. Alternatively, it is the net difference between the assets and the liabilities.

XYZ Ltd
Statement of Financial Position as at …
$ $ $
Non Current Assets Cost Accumulated Net Book Value
Depreciation
Land and Building XXX (XXX) XXX
Motor Vehicle XXX (XXX) XXX
Plant XXX (XXX) XXX
XXX (XXX) XXX
Current Assets
Stock (closing) XXX
Accounts receivable(debtors) XXX
Less provision for bad debts (XXX) XXX
Bank (if on the debit side) XXX
Cash XXX
XXX
XXX
Current Liabilities
Accounts payable/creditors XXX
Bank overdraft (if on the credit side) XXX
XXX
Non Current Liabilities
Mortgage, Loan, Debenture XXX

Equity
Capital XXX
Add net profit XXX
Less drawings (XXX)
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 XXX
XXX

Lecture Example

From the following trial balance for the books of Dory the Bird, as at November 30, 2012. Prepare a set of
financial statements (statement of profit or loss and the statement of financial position):

Details DR CR
Capital 125,000
Loan 75,000
Land & Building 134,385
Fixtures & Fittings 32,000
Machinery & Equipment 25,000
Debtors 12,500
Carriage Inwards 1,250
Return Inwards 2,700
Return Outwards 2,300
Carriage Outwards 1,085
Creditors 13,200
Sales 125,000
Purchases 82,345
Commission Received 5,500
Motor Vehicle 30,400
Rent Received 4,200
Wages & salaries 22,400
Telephone charges 2,500
Stock at Dec 1. 2011 10,000
Drawings 5,000
Bank 12,400
Cash 2,035
Discount received 2,400
Discount allowed 1,400

----------- --------------
365,000 365,000
======== =========

End note:

Stock at November 30, 2012 was 35,000.

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LECTURE QUESTION SOLUTION

Dory the Bird Statement of profit or loss

for year ended November 30, 2012      
  $ $ $
Sales   125,000  
less return inwards   (2,700)  
less discount allowed (1,400)
Net Sales     120,900
Cost of Sales      
Opening Stock   10,000  
Purchases 82,345    
Carriage inwards 1,250    
Return Outwards (2,300)    
Discount received (2,400)
Net Purchases   78,895  
COGAFS   88,895  
Closing Stock   (35,000)  (53,895)
GROSS PROFIT     67,005
Other Income      
Rent received 4,200
Commission received 5,500
Total other income     9,700
Total Income     76,705
Less Expenses      
Carriage outwards 1,085
Wages 22,400  
Telephone Charges 2,500  
(25,985)
NET PROFIT     50,720

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Dory the Bird Statement of Financial
Position as at November 30, 2012
Non-Current Assets      
Accumulated
  Cost Depreciation Net Book Value
Land and Building 134,385 - 134,385
Machinery and Equipment 25,000 - 25,000
Fixtures and Fittings 32,000 - 32,000
Motor Vehicle 30,400 - 30,400
  221,785 - 221,785
       
Current Assets      
Closing Stock   35,000  
Debtors/Accounts Receivable 12,500    
less PFBD (new) (-) 12,500  
Cash 2,035
      49,535
      271,320
       
Current Liabilities      
Creditors/Accounts payable   13,200  
Bank Overdraft 12,400
      25,600
       
Non-Current Liabilities      
Loan     75,000
       
Equity      
Opening capital   125,000  
Net profit   50,720  
Drawings (5,000)  
      170,720
      271,320

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Tutorial Questions

The following is a list of accounts obtained from the books of Hayden Williams as at March 31, 2011:

Details DR CR

Capital 200,000
Drawings 15,500
Loan 160,000
Land & Building 120,000
Fixtures & Fittings 45,200
Machinery & Equipment 60,000
Debtors 23,220
Carriage Inwards 2,510
Return Inwards 4,700
Return Outwards 3,500
Carriage Outwards 5,210
Creditors 21,500
Sales 233,480
Purchases 135,040
Motor Vehicle 65,000
Rent Received 16,250
Wages & salaries 52,500
Telephone charges 8,500
Donations to charity 12,000
Stock at Apr 1. 2010 31,500
Bank 37,500
Cash 12,350
Discount Allowed 7,500
Discount Received 3,500
----------- --------------
638,230 638,230
======== ========

End note:
Closing Stock at March 31, 2011 was $53,500.

Required: Prepare the statement of profit or loss for the year ending March 31, 2011, and the statement of
financial position as at that date

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The following is a list of accounts obtained from the books of Ludlow Peynado as at December 31,
2012:

Details DR CR

Loan 60,000
Land & Building 140,000
Fixtures & Fittings 35,000
Machinery & Equipment 40,000
Debtors 16,500
Capital 110,000
Carriage Inwards 1,500
Return Inwards 1,700
Return Outwards 2,500
Carriage Outwards 2,500
Creditors 12,000
Sales 223,480
Purchases 92,345
Commission Received 5,500
Motor Vehicle 40,000
Rent Received 4,200
Wages & salaries 35,000
Drawings 7,000
Telephone charges 5,500
Stock at Jan 1. 2012 21,000
Bank 22,400
Cash 2,035
----------- --------------
440,080 440,080
======== ========

End note:

Stock at December 31, 2012 was 37,500.

Required:Prepare the statement of profit or lossfor the year ending December 31, 2012, and the statement of
financial position as at that date