UNIT 06 (part 01)

FINANCIAL STATEMENTS FOR SOLE TRADERS

 Introduction
Financial statements are the statements prepared to identify the operational results and financial
position of a business for a specific accounting period. This basically includes,

 Statement of profit of loss

 Statement of financial position
 Statement of cash flows

 Statement of profit or loss

This is prepared to compute profit or loss of a business for an
accounting period. It has 2 aspects.

 Trading account
 Profit or loss account
This is prepared using the income and expense accounts in the ledger. Those are transferred to
the income statement using the closing entries as below.

Income accounts Expense accounts

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o Trading account
This is prepared to calculate the Gross Profit or Gross Loss of a business. The difference
between sales income and the cost of sales is generally known as gross profit or gross
loss.

Gross profit / loss =

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Sales income (Turnover)
The income from selling goods which were purchased for the purpose of resale is identified as
sales. Both cash and credit sales are taken into considered here.

Sales income =

Cost of sales
The purchase cost of goods sold during the accounting period is the cost of sales.

Cost of sales =

Format for the trading account

Nihal business
Trading account
For the year ended 31/03/2020
Sales
Less : return inwards (sales
return)

Cost of sales
Opening stock
Add: purchases
Import duties
Carriage inwards

Less: return outwards

Stocks available for sale

Less : closing stock

Gross profit

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 o Profit and loss account
This is prepared to calculate the Net Profit or Loss for the accounting period. It includes
 The gross profit or loss calculated in trading account
 All income which are not recorded in the trading account
 All expenses which are not recorded in the trading account

Classification of expenditure in the P/L account

i. Distribution expenses

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ii. Administration expenses

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iii. Other expenses

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iv. Finance expenses

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 Format for the profit and loss account

Gross Profit

Other Income
Commission Received
Discount Received
Interest Received
Donations Received
Investment Income
Sundry Income

Distribution Expenses
Sales Commission
Advertising
Depreciation
Maintenance Of Motor Vehicle
Bad Debts
Discount Allowed
Doubtful Debts

Administration Expenses
Rent
Insurance
Rates
Electricity
Salary
Telephone
Stationary
Postage
Professional Fees

Other Expenses
Stock Losses
Stock Written Off
Donations

Finance Expenses
Loan Interest
Overdraft Interest
Lease Interest

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 Statement of financial position
This is prepared to show the financial position of a business at a given date. It includes
assets, liabilities and equity of the business. It complies the basic accounting equation of
Assets = Liabilities + Equity.

Important points when preparing SOFP

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Format for the statement of financial position

Business name and date should be state here.
ASSETS cost Accumulated Carrying
Noncurrent assets depreciation amount
Land and buildings
Machineries
Motor vehicle
Furniture

Goodwill
Investment
Fixed deposit

Current asset
Inventory
Debtor
Less: provision for doubtful debts
Prepayments
Income receivables
Bank balance
Cash in hand
Total assets

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 Equity and liabilities
Capital
Add: net profit
Less: drawings

Noncurrent liabilities
Bank loans
Other long term loans

Current liabilities
Creditors
Bank overdraft
Accrued expenses
Income received in advance
Total equity and liabilities

Cash Basis and Accrual Basis of Accounting

Cash basis

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Accrual basis

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 Adjustments to the financial statements
 Financial statements are prepared for a specific period under PERIODICITY
CONCEPT.
 Since it generally includes 12 months, it is considered as an Accounting Year.
 Income statement should prepare for a specific period and SOFP is prepared at a
given date. Thereby all the transactions occurred during the period are considered.
 The accounting entries entered in ledger accounts for this purpose are known as
Adjusting Entries.
Main Adjusting Entries
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