Chapter-14

Financial Statements of a Sole Traders

When a person starts a business his/her aim is to make a profit. The profit (or loss)
is calculated in the financial statements which are usually prepared at the end of each
financial year. Financial statements basically consist of two parts:
1. Income Statement (To known profit or loss for the business)
2. Statement of Financial Position (To known the conditions of Assets,
Liabilities, Capital)

1.Income Statement
An income statement is a statement prepared for a trading period to show the gross
profit and profit for the year.
An income statement which consists of two sections:

2.Statement of Financial Position (SOFP)

A statement of financial position shows the assets and liabilities of the business at
a certain date. The statement of financial position is not part of the double entry
system.

1
Format
Business Name
Income statement for the year ended ……………
$ $ $

Sales ***
(-) Return inwards (***) ****
Less: Cost of Goods Sold
Opening Inventory ****
(+) Purchases ***
(+) Carriage Inwards ***
(-) Return Outwards (***)
(-) Drawings (goods) (***)
****
(-) Closing inventory (***)
(****)
Gross Profit ****
Add: Income
Discount Received ***
Provision for irrecoverable debts (Decrease) ***
Rent Received (+) Accrue (-) Prepaid ***
****
***
Less: Expenses
Discount Allowed ***
Provision for irrecoverable debts (increase) ***
Bad debts ***
Insurance (+) Accrue (-) Prepaid ***
Depreciation on Non-Current Asset (this year only) ***
(***)
Net profit ***

2
Statement of financial position as at ………………….
Cost Accumulated Net Book
($) Depreciation Value
($)
Non-Current Assets
Building *** (***) ****
Machinery *** (***) ****
*** (***) ****
Current – Assets

Closing Inventory ***

Account Receivable ***
Provision for bad debts (this year) (***)
Cash ***
Bank ***
Accrue Income ***
Prepaid Expenses ***
****
Total Assets ****

Capital and Liabilities

Capital
Net profit ****
(-) Drawing (Goods, Cash) ****
(****)

Less: Current Liabilities ****

Bank Overdraft ****
Account Payable ****
Accrue Expenses ****
Prepaid Income ****
****
Long –Term Liabilities
Bank Loan ****

****

3
 Additional Information
Income statement (cost of sales)
1. Closing inventory
Statement of financial position (current- asset)
Income statement (expense +)
2. Accrue expense
Statement of financial position (current liability)
Income statement (income +)

3. Accrue income
Statement of financial position (current asset)

Income statement (expenses-)

4. Prepaid expense
Statement of financial position (current asset)

Income statement (Income-)

5. Prepaid Income
Statement of financial position (current liability)
Income statement (increase ---- Expense)
(Decrease ----- Income)

6. Provision for bad debts

Statement of financial position {this year}
(Account Receivable -)

Income Statement (Expense)

7. Depreciation of Non-current Assets

Statement of financial position
(Non-Current assets -)

4
 End of the Chapter Questions(page-165)

1. All the income and expenses of the business and how much profit is made.
2. All the assets, liabilities and capital of the business and the value of the
business.
3. An asset that is owned and used by the business for more than one year.
4. The cost of the items used for resale. (Opening Stock+ Net Purchases-
Closing Stock)
5. Money invested in the business by the owner or owners.

Exam Practices

5
Ans……B……

Ans……A………

Ans……C………

6
Ans……A………...

Ans……C…………

Ans……C…….

Ans……A……….

7
Ans……C………

Ans……A……. (50 x 10 = 500) + (1450 x 15 = 21750)

Ans…. B…….

8
Page-159
Example-1

Prepare Income Statement and Statement of Financial Statement for Jasdeep Shara.

9
 Jasdeep Shara
Income Statement for the year ended 31.12.2016
Sales Revenue 80000
(-) SR (5000)
Net Sales 75000
Costs of Sales
Opening Stock 7000
(+) Purchases 34000
(-) PR (3000)
(+) CI 300
Net Purchase 31300
(-) Closing Stock (3300)
Costs of Goods Sold (35000)
Gross Profit 40000

10
 Jasdeep Shara
Income Statement for the year ended 31.12.2016
£ £
Sales Revenue 80,000
(-) Revenue Return (5,000)
Net Sales 75,000
(-) Costs of goods sold
Opening Stock 7,000
(+) Purchase 34,000
(-) Purchases Return (3,000)
(+) Carriage Inwards 300
Net Purchases 31,300
(-) Closing Stock (3,300) (35,000)
Gross Profit 40,000
(+) Income -

(-) Expenses
Rent 6,000
Wages 8,000
Electricity 2,000
Administration 3,000
Fuel 2,500
Insurance 1,500
(23,000)
Profit for the year 17,000

11
 Jasdeep Shara
Statement of Financial Position as at 31.12.2016
£ £
Non-Current Assets
Buildings 50,000
Motor Vehicles 25,000 75,000
Current Assets
Inventory 3,300
Trade Receivables 6,000
Bank 4,000
Cash 400 13,700
Total Assets 88,700

Capital and Liabilities

Equity 60,000
(-) Drawings (12,000)
(+) Profit for the year 17,000 65,000

Non-Current Liabilities
Bank Loan 20,000

Current Liabilities
Trade Payable 3,700
Total Liabilities 23,700
88,700

12
Page-161
Case Study

13
 Jasraj
Income Statement for the year ended 31.12.2016
£ £
Sales 150,000
(-) Revenue Return (6,000)
Net Sales 144,000
(-) Costs of goods sold
Opening Stock 12,000
(+) Purchases 45,000
(+) Carriage Inwards 500
(-) Purchases Return (6,000)
Net Purchase 39,500
(-) Closing Stock (8,000)
(43,500)
Gross Profit 100,500
(+) Income -
(-) Expenses 10,000
Administration 7,000
Electricity 5,000
Fuel 6,000
Insurance 30,000
Rent 25,000
Wages
(83,000)
Profit for the year 17,500

14
 Jasraj
Statement of Financial Position as at 31.12.2016
£ £
Non-Current Assets
Buildings 100,000
Motor Vehicle 30,000 130,000
Current Assets
Inventory 8,000
Trade Receivable 3,000
Cash 25,000 36,000
Total Assets 166,000

Capital and Liabilities

Equity 100,000
(-) Drawings (12,000)
(+) Profit for the year 17,500 105,500

Non-current Liabilities
Bank Loan 29,500
Current Liabilities
Trade Payable 18,000
Bank 13,000
Total Liabilities 60,500
Total Capital and Liabilities 166,000

15
Page-167
No-11

Machinery
Net Book Value (Carrying Value) = Cost-Provision for depreciation
= 20,000-12,000= 8,000
Working Capital = Current Assets – Current Liabilities

16
 (a) Bonnie
Statement of Financial Position as at 31.3.2016
Cost Provision Carrying
for Value
Depreciation (N.B.V)
Non-Current assets
Machinery 20,000 (12,000) 8,000

Current assets
Inventory 3,000
Trade Receivables 1,000
Bank 500
4,500
Total Assets 12,500

Capital and Liabilities

Capital 6,000
(+) Profit for the year 7,500
(-) Drawings (4,500) 9,000

Current Liabilities
Trade payables 700
Non-current Liabilities
Bank Loan 2,800
3,500

Total Equity and liabilities 12,500

(b)
i. Money used for the day-to-day running of the business.
Formula
Working Capital = Current Assets – Current Liabilities
ii. 4,500-700 = 3,800

17
No-12

18
 Amir Aadiq
Income Statement for the year ended 31.3.2016
£ £
Sales revenue 200,000
(-) Revenue returns (12,000)
Net revenue 188,000

(Less) Cost of Sales

Opening Inventories 18,000
Purchases 99,000
(+) Carriage inwards 4,000
(-) Purchase returns (8,000)
Net purchases 95,000
Closing Inventories (17,000)
Cost of goods sold (96,000)
Gross profit 92,000
(Less) Expenses
Rent 40,000
Wages 25,000
Electricity 7,000
Administration 10,000
Fuel 21,000
Insurance 6,000 (109,000)
Loss for the year (17,000)

Gross Profit £ 92,000

Loss for the year (£ 17,000)

19
 Amir Aadiq
Statement of Financial Position as at 31.3.2016
£ £
Non-current Assets
Buildings 140,000
Motor Vehicles 37,000
177,000
Current Assets
Inventories 17,000
Trade Receivables 3,000
Cash 15,000
35,000
Total Assets 212,000

Capital and Liabilities

Capital 180,000
(-) Loss for the year (17,000)
(-) Drawings (22,000)
141,000

Non-Current Liabilities
Bank loan 40,000
Current Liabilities
Trade Payables 18,000
Bank 13,000
71,000
Total Capital and Liabilities 212,000

20
No-13

Rajia
SOFP as at 31 December 2015
$ $
Non-current Assets 50,500
Current Assets 47,000
Total Assets 97,500

Capital and Liabilities

Capital 74,000
(+) Profit for the year 3,000
(-) Drawings (9,000)_
68,000

Current Liabilities 19,000

87,000

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Page-168
No-14

Prepare income statement and statement of financial position for Solomon.

(20 marks)

22
 Solomon
Income Statement for the year ended 31.12.2016
£ £
Sales revenue 50,000
(-) Sales returns (17,500)
Net revenue 482,500
(Less) Cost of Sales
Opening Inventories 12,345
Purchases 237,899
(+) Carriage Inwards 4,321
(-) Purchase Returns (8,888)
Net Purchases 233,322
Closing Inventories (17,000)
Cost of Goods Sold (228,677)
Gross profit 253,823

(Less) Expenses
Rent 44,444
Wages 22,552
Electricity 7,777
Administration 11,111
Fuel 21,211
Insurance 6,789
(113,884)
Profit for the year 139,939

23
 Solomon
Statement of Financial Position as at 31.12.2016
£ £
Non-Current assets
Buildings 250,000
Motor Vehicle 55,555 305,555
Current Assets
Inventory 17,000
Trade Receivable 3,456
Cash in hand 34,567 55,023
360,578
Capital and Liabilities
Capital 123,456
(-) Drawings (20,483)
(+) Profit for the year 139,939 242,912

Total Liabilities
Non-current Liabilities
Bank Loan 44,444
Current Liabilities
Tarde Payable 18,901
Bank Overdraft 54,321 73,222
360,578

24
Example-1

25
 Leo
Corrected Income Statement for the year ended 30 April 20–1
$ $
Sales Revenue 82,300
(-) Sales Return (1,190)
Net Sales 81,110
Less: Cost of Goods Sold
Opening Inventory 4,910
(+) Purchase 49,520
(+) Carriage Inwards 100
Net Purchase 49,620
(-) Closing Inventory (5,080)
(49,450)
Gross Profit 31,660
(+) Other Income
Discount Received 110
Rent Receivable 6,000 6,110
37,770
(-) Other Expenses
Discount Allowed 220
Rent Payable 8,100
Wages 12,100
Sundry Expenses 960
(21,380)
Profit For the Year 16,390

26
Example-2

27
For Income Statement

28
 Samir
Income Statement (Trading Section) for the year ended 31 May 2008
$ $
Sales Revenue 95,700
(-) Sales Return (1,000)
Net Sales 94,700

Less: Costs of Goods Sold

Opening Stock 7,100
(+) Purchases 65,000
(-) Purchases Return (500)
(+) Carriage Inwards 1,500
(-) Goods Drawings (300) 65,700
(-) Closing Stock (7,600) (65,200)
Gross Profit 29,500

Samir
Income Statement (Profit and Loss Section) for the year ended 31 May 2008
$ $
Gross Profit 29,500
(+) Other Income
Discount Received 400
29,900
(-) Other Expenses
Discount Allowed 900
Wages 11,200
General Expenses 2,800
Property Tax 600
Loan Interest 500 (16,000)
Profit for the year 13,900

Profit from Operation? (13,900+500=14,400)

29
30
31
32
Income Statement of a Service Business
A service business is one which does not buy and sell goods, such as an accountant,
an insurance company, a travel agent, a hairdresser and so on. At the end of the
financial year, these businesses still need to prepare financial statements. However,
the trading account section of the income statement is not prepared as no goods are
bought and sold. Only the profit and loss section of the income statement and a
statement of financial position are prepared.

Chapter Summary
The difference between the selling price and the cost price is known as the
gross profit. This is calculated in the trading account section of the income
statement.
The difference between the gross profit, plus other income, less other
expenses is known as the profit for the year. This is calculated in the profit
and loss account section of the income statement.
All the items appearing in the income statement are transferred from the ledger
accounts to complete the double entry.
A profit for the year is transferred to the credit of the capital account and a
loss for the year is transferred to the debit of the capital account.
A business which provides a service only prepares the profit and loss account
section of the income statement.

33
Problem-1

Anita
Income statement for the year ended 30 September 20–5
Revenue $ $
Commissions Received 92,150
(Add) Rent Receivable 7,300
99, 450
(Less) Expenses
General expenses 8,950
Insurance 2,670
Printing and stationery 4,560
Wages 43,500
(59,680)
EBIT 39,770
(-) Loan Interest (1,500)
EBT 38,270
(-) Property Tax (6,400)
Profit for the year 31,870

(Note: EBIT= Earnings Before Interest and Tax = Operating Profit)

34
Problem-2

35
 Ayesha
Income Statement for the year ended 30 September 20-3
$ $
Revenue
Fees from clients 65,950
Rent Receivable 6,000 71,950

Less: Expenses
Insurance 3,110
Printing and Stationery 2,480
Wages 59,650
Office Expenses 3,120 (68,360)

Profit for the year 3,590

Ayesha
Statement of Financial Position as at 30 September 20-3
$ $
Non-Current Assets
Premises 95,000
Office Furniture 21,600 116,600
Current Assets
Trade Receivable 6,150
Cash 150 6,300
Total Assets 122,900

Capital 125,000
(-) Drawings (15,200)
(+) Profit 3,590 113,390
Liabilities
Current Liabilities
Bank Overdraft 9,510
Total Capital and Liabilities 122,900

36
Problem-3

37
 (a) Abhinav
Trial Balance as at 30 June 20–8
Dr ($) Cr ($)
Capital (SOFP) - 54,400
Drawings (SOFP) 1,300 -
Premises (SOFP) 30,000 -
Fixtures (SOFP) 4,000 -
Revenue (IS) - 82,000
Purchases (IS) 70,100 -
Inventory (1.7.20-7) (IS) 18,600 -
Carriage Inwards (IS, P+) 400 -
Carriage Outwards (IS-exp) 1,500 -
Trade Receivables (SOFP-CA) 14,000 -
Trade Payables (SOFP-CL) - 8,000
Discount Received (IS-Income) - 210
Insurance (IS-exp) 390 -
Sundry Expenses (IS-exp) 340 -
Wages (IS-exp) 10,300 -
Rates (IS-exp) 1,200 -
Loan Interest (IS-exp) 500 -
Long-term Loan from ABC Loans - 10,000
(SOFP-NCL)
Cash at bank (SOFP-CA) 1,980 -

Total 154,610 154,610

Inventory (30.6.2008) $ 20,100

38
 (b) Abhinav
Income Statement for the year ended 30 June 20–8
$ $
Sales Revenue 82,000
(Less) Costs of Sales
Opening Stock 18,600
(+) Purchase 70,100
(+) Carriage Inwards 400
Net Purchases 70,500
(-) Closing Stock (20,100)
Costs of Goods Sold (69,000)
Gross Profit 13,000
(+) Income
Discount Received 210
(-) Expenses 13,210
Carriage Outwards 1,500
Insurance 390
Sundry Expenses 340
Wages 10,300
Rates 1,200
Loan Interest 500
(14,230)

Loss for the year (1,020)

39
 (c) Abhinav
Statement of Financial Position as at 30 June 20–8
$ $
Non-Current Assets
Premises 30,000
Fixtures 4,000 34,000
Current Assets
Inventory 20,100
Trade Receivable 14,000
Cash at Bank 1,980
36,080
Total Assets 70,080

Capital and Liabilities

Capital 54,400
(-) Drawings (1,300)
(+) Loss for the year (1,020)
52,080
Non-Current Liabilities
ABC Loans 10,000
Current Liabilities
Trade Payable 8,000
Total Liabilities 18,000

Total Capital and Liabilities 70,080

40
Adjustments

1. Bad Debts or Irrecoverable Debts written off

Expenses (Income Statement)
Allowance for Bad Debts or Irrecoverable Debts
Credit Sales to customers- Trade Receivables (CA)
States - Normal (Exp) eg-100
- Increase (Exp) eg-120
- Decrease (Income) eg-70
Income Statement (Income or Expenses)
SOFP- Trade Receivables less
2. Prepaid/Advance Expenses
A prepaid expense is a type of asset on the balance sheet that results from
a business making advanced payments for goods or services to be received
in the future.
Income Statement
Respective Expense less
(Salary 150,000 - prepaid 3,000= 120,000 per year)
SOFP
Current Assets

Accrued/Outstanding/Due/Arrear Expenses
An accrued expense, also known as an accrued liability, is an accounting
term that refers to an expense that is recognized on the books before it has
been paid. The expense is recorded in the accounting period in which it is
incurred.
Income Statement
Respective Expenses add
(Electricity 20,000 + accrued 5,000 = 25,000)
SOFP
Current Liabilities

Prepaid Income
Prepaid income is funds received from a customer prior to the provision of
goods or services.

41
 Accrued Income
Accrued revenue is revenue that has been earned by providing a good or
service, but for which no cash has been received. Accrued revenues are
recorded as receivables on the balance sheet to reflect the amount of money
that customers owe the business for the goods or services they purchased.
Prepaid/Advance Accrue/Arrear
Expenses/Income - +
Prepaid Expenses CA
Accrued Expenses CL
Prepaid Income CL
Accrued Income CA

3. Depreciation (On Fixed Assets)

1. Straight Line Method = Cost – Scrape Value or Cost x Rate of%
Useful Life
2. Reducing Balance Method = Net Book Value x Rate of %
(N.B.V = Cost – Depreciation to date or Accumulated Depreciation)
Year 1
Dep = 500,000 x 20% = 100,000
N.B. V= 500,000-100,000= 400,000
Year 2
Dep= 400,000 x 20% = 80,000
NBV = 500,000-180,000 =320,000
Year 3
Dep= 320,000 x 20% =64,000
NBV= 500,000-244,000= 256,000
Year 4
Dep= 256,000 x 20%=51,200
NBV=500,000-295,200= 204,800
Year 5
Dep-204,800 x 20% = 40,960
NBV= 500,000 – 336,160 = 163,840
Year 6
Dep = 163,840 x 20% = 32768
NBV = 500,000 – 368,928 = 131,072

42
1. Income Statement – Expenses
2. SOFP – (Non-Current Assets less)

43