Final Accounts of a sole trader

Trading and Profit and Loss Account

and Balance Sheet
 Final Accounts
• This varies according to the nature of the activity
covered e.g. trading, manufacturing, charity.
• The needs of management in the way of information
and the entity accounted for e.g. sole trader,
partnership or company.
• Trading account, manufacturing account, profit and
loss account and income and expenditure account are
all revenue accounts or income statements.
• The profit or loss of an entity is determined by
preparing this accounts.
 Capital Accounts
• These accounts show items which are not of a
revenue nature.
• The balances on such accounts are carried
forward from one period to the next.
• They are not transferred to revenue account at
the end of the period.
• They are listed at the end of the period in the
balance sheet to give a complete picture of the
entity.
 Common items the income statement of a
sole trader
• Turnover (sales)
• Operating revenues
• Cost of goods sold
• Gross profit
• Operating expenses
• Operating profit
• Other income
• Other expenses
• Net profit/loss
 Sections of the Income Statement of a Sole
Trader
• The first section is the Trading account where
the Gross Profit is determined by deducting
cost of goods sold from turnover (sales)
• The following section is the Profit and Loss
Account where the operating expenses is
deducted from the Gross Profit to determine
the net profit.
Distinction between a Trading Account and a
Manufacturing Account
• A manufacturing account deals with only raw
materials, work in progress and manufacturing
expenses.
• A trading account deals only with finished
goods, i.e. goods ready for sale whether they
are manufactured or purchased.
• The cost of goods manufactured and sold as
shown in the manufacturing account is
transferred to the debit of the trading account.
 Balance Sheet
• This is a statement showing the financial position
of an entity at a particular point in time.
• It is often prepared at the end of each trading or
financial period.
• It shows the assets and liabilities of the entity as
at a date.
• It is a classified summary of the debit and credit
balances existing in the ledger after the profit and
loss account has been constructed.
 Differences between a Trial Balance and a
Balance Sheet
• A trial balance is a list of all the ledger
balances, not only assets and liabilities, but
also revenue and expenses.
• A balance sheet is a list of a part only of the
ledger balances.
Accruals, Prepayments and Adjustments
• The aim of any income statement is to accurately report all the
revenue in the accounting period and to deduct from all the
expenses of generating those revenues.
• The matching principle provides that, not only must income be
matched to expenses, but both must also be matched to the
period of account (i.e. accrue for losses and adjust for
prepayments).
• The matching principles does not apply in all cases.
• Consequently, the conservative (prudence) convention require
entities to provide (accrue) for any anticipated losses, but not to
bring in any anticipated profits until they have actually been
realized.