Basic Financial

Statements (Sole
Traders & Partnerships)
BA7001 Financial Accounting & Financial
Management
 Learning Outcomes
By the end of this session, you should be able to:

 Describe the financial accounting process

 Construct a basic statement of financial position (balance sheet)

for a sole trader and partnership business

 Construct a basic statement of profit and loss for a sole trader and
partnership business
Financial Accounting Process
Transactions occur

Transactions recorded in the ‘accounts’

Accounts are ‘balanced’ –

summarising effect of transactions

Trial balance drawn up

Post trial balance adjustments made

Financial statements constructed

Statement of Financial Position /
Balance Sheet
 The Accounting Equation
The statement of financial position / balance sheet is founded on
the ‘accounting equation’. This equation is at the heart of financial
accounting.

Assets - Liabilities = Capital

 https://www.flaticon.com/free-icons/asset
Assets, Liabilities & Capital

>Asset icons created by monkik

An asset is a tangible or intangible resource that is
owned or controlled by an accounting entity, and which
is expected to generate future economic benefits.

A liability is a legal obligation to transfer assets or

provide services to another entity which arises from
some past transaction or event.

Capital is the difference between an entity's assets and liabilities.

It is the ‘worth’ / ‘wealth’ of a business and belongs to the
Owner
owner(s).
 The Business Concept & Capital
Technically capital belongs to the owners of
the business, not the business itself, and is,
therefore, a liability of the business
Assets = Liabilities + Capital

Profit also belongs to the owner(s) and

increases owner’s investment and is,
therefore, also a liability of the business
Assets = Liabilities + Capital + Profit

M&S, 2022 Report

Company statements of financial position
often reflect the above equation or show the
ownership section separately i.e.
Assets - Liabilities = Capital + Profit
 The Business Concept & Capital (cont.)
For small business internal purposes, however, the following re-working is useful:

Non-current (NC) A + Current(C)A – CL = Cap + Profit + NCL

CA - CL = Working Capital

Therefore: NCA + WC = Cap + Profit + NCL

or NCA + WC – NCL = Cap + Profit

You may also find some businesses referring to “fixed” assets, instead of “non-current”
 Balance Sheet for Business at Date
£ £
£ £ £
Financed by:
Fixed Assets (Non current assets):
 E.g. Land & Buildings / e.g. Plant & Machinery x Capital X

- E.g. Vehicles / e.g. Furniture & Fittings x Profit X X

X Long term debt X

Current Assets: X
 Stock (Inventory) x
 Trade debtors (receivables) x Note how items are listed in
 Cash & Bank x order of liquidity – from
X least liquid to most liquid
Current Liabilities: (both in terms of balance
 Trade creditors (Payables) x sheet categories and the
 Bank overdraft x (X) items within each category
Net Current Assets (Working capital): (CA – CL) X

Total Assets less Current Liabilities (Capital employed): add FA X

Less Long term debt (X)
X
 The Balance Sheet (the term more likely used by
smaller businesses)

i. Balance sheet (BS) / Statement of Financial Position (SFP) shows

position at a single point of time;
ii. BS / SFP shows the resources and the debts of the businesses;
iii. Suggests the ability of the business to pay its debts and it’s level
of riskiness e.g. can check current assets against current
liabilities – working capital;
iv. Non-current assets useful for securing long term debt.
 Exercise 1
The lists of “balances” to £
the right are for Bola’s Big Bank 1,045
Business as at 30 Fixtures and fittings 25,000
September 2022. Trade receivables 365
Equipment 12,600
Required: Trade payables 265
Profit 1,245
Construct a balance sheet
for Bola’s Big Business to Inventory (stock) 2,500
show working capital.
Sorry, my mistake –
original Q stated
“working” capital
Solution
Check!
Did you include:
 The name of the business?
 The title of the statement?
 The date “as at”?
 Include all the subheadings
e.g. non-current assets,
current assets, and working
capital, capital employed?
 Have you order items in order
of liquidity?
Income Statement / Statement of Profit or Loss /
Profit and Loss Statement
 Income Statements
The income statement (or profit and loss account / statement)
provides a summary of the results of a business's trading activities
during a given accounting period. It shows the profit or loss for the
period.

The purpose of this statement is to enable users, such as the

owner(s), to evaluate how well a business has ‘performed’ during a
certain period.
 Basic Income Statement
Income Statement for Business Name for the e.g. year ended date
£ £
Revenue X
Less expenses:
e.g. Rent x
e.g. Electricity x
e.g. Salaries & wages x
e.g. Depreciation x
e.g. Postage & stationary x X
Net profit (loss) X
Trading & Profit & Loss Account
(Trading and) Profit and loss account for Business Name for the year ended xx/xx/xxxx
£ £
Sales (Income / Revenue / Turnover) X

Trading a/c Profit & loss a/c

Less: cost of sales/goods sold
(X)
Opening stock (inventory) x
Add Purchases x
Less Closing stock (inventory) (x)
Gross (Trading) profit X
Less: expenses
e.g. rent x
e.g. administration x
e.g. insurance x
e.g. loan interest x (X)
Net profit X
 Company Income Statements….
… follow the same
main order but, in
order to summarise
the information, some
items are combined
into single headings
while other, new
headings may be Ted Baker, 2022 Report
included, representing
the more complex
nature of companies
 Importance of the Income Statement / Statement of Profit or
Loss

i. Assessment of Performance
ii. Taxation (function of profitability)
iii. Dividend Policy (companies only)
iv. Monitoring Device:
e.g. management and owners
e.g. government bodies
e.g. trade unions
 Exercise 2
£
The lists of “balances” to Rent 12,000
the right are for Fahad’s Purchases 261,400
Fabulous Firm as at 31 Stock as at 31/8/21 16,850
August 2021. Electricity 6,895
Sales 512,300
Required: Wages to employees 168,500
Stock as at 1/9/20 25,000
Construct a statement of
Insurance 22,650
profit or loss for Fahad’s
Fabulous Firm.
Solution

Check!
Did you include:
 The name of the business?
 The title of the statement?
 The relevant period “ended”?
 Include all the subheadings e.g.
less CoS, less expenses, and
subtotals e.g. gross profit, net
profit?
 Note - Cash and Profit
 Cash and profit are not the same
thing
 Nor is the profit necessarily
represented by an increase in cash
 Profit may take the form of many
different assets, of which cash is
merely one
 Profit is always reflected in an
increase in owners’ worth/holding o m / use
r/

and forms part of the ‘financed by’ ps:

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section of the balance sheet Kub
 Classifying and Placing Items
Item £ A/L/C/R/E BS or SPL
The list of balances Shop premises 45,000 A BS
shown on the right, Selling & distribution costs 75,000 E SPL
have been provided Vehicles 30,000 A BS
for the year ended Receivables / debtors 15,300 A BS
30 June 2022. Capital 100,000 C BS
Payables / creditors 5,000 L BS
State whether they Sales 200,000 R SPL
are asset, liability, Purchases 90,000 E SPL
capital, revenue or Fixtures & fittings 4,000 A BS
expense and state Administration costs 55,000 E SPL
their relevant Bank 5,500 A BS
financial statement. Retained profit 18,785 C BS
Stock / inventory as at 30 June 2021 3,000 E SPL
 Business Entity and Sole Trader / Partnership ‘Drawings’

 ‘Drawings’ are those monies & assets in the

business which are used for the owner’s personal
use.
 In accounting terms, the owner is separate to the
company and personal use does not constitute an
expense of the business – business entity concept
 Drawings, therefore, are deducted from the
owner’s profit or capital and not included as an
expense of the business
 Salaries and wages paid to sole traders or
partners in a partnership are “drawings”.
 Exercise 3 Shop premises
£
45,000
Fixtures & fittings 4,000
You have been provided with Purchases 90,000
the list of balances to the right Trade receivables 15,300
for the year ended 31/12/21. Administration costs 55,000
You are also informed that the Sales 200,000
stock take conducted on Stock as at 31/12/20 3,000
31/12/21 revealed closing Vehicles 30,000
stock valued at £5,000. Drawings 11,200
Selling & distribution costs 75,000
Bank 5,500
Required: Capital 100,000
Construct the statement of Petty cash 985
profit or loss and the Retained profit 29,985
statement of financial Trade payables 5,000
position.
 Solution

https://www.pngegg.com/en/png-zvehr
 Partnership Accounts
Distinctions between partnership accounts and sole
trader accounts are:
 The appropriation account under the profit and
loss account / income statement
 There is no appropriation account for sole traders who
show individual year’s profit separate to capital on
SFP/BS, then incorporates it into capital figure
 Partners have an appropriation account to show how
the profit earned is divided between the partners
 The capital accounts and current accounts
shown in the ‘financed by’ section in the balance
sheet:
 Capital  Partners’ capital accounts
 Profit  Partners’ current accounts – partners’
profits are kept separate to capital accounts
 Partnership Example
Two partners are in a business
 Partner 1 has £10,000 invested as capital and has £5,000 in profits
from previous years
 Partner 2 has £20,000 invested as capital and has £8,000 in profits
from previous years
During the year 2021:
 Partner 1 withdrew £10,000 from profits and added £5,000 to capital
 Partner 2 withdrew £15,000 from profits and £2,000 from capital
 £15,000 profit is made by the business

The partnership agreements states:

 10% interest on capital earned on the amount of capital remaining at
the end of the year - Don’t know end of year capital yet!
 5% interest charged on profit withdrawn during the year, regardless of
when taken We can calculate this! P1 = £500, P2 = £750
 Salary of £5,000 per annum paid to each
 Bonus to be calculated as % of revenue generated (£1,000 for partner 1
and £500 for partner 2 in 2021)
 Remaining profit shared equally between the two partners
 Partnership Example
Two partners are in a business
 Partner 1 has £10,000 invested as capital and has £5,000 in profits
from previous years
 Partner 2 has £20,000 invested as capital and has £8,000 in profits
from previous years

Capital Partner 1 Partner 2 Total

a/cs £ £ £
Bal b/d 10,000 20,000 30,000
 Partnership Example
During the year 2021:
 Partner 1 withdrew £10,000 from profits and added £5,000 to capital
 Partner 2 withdrew £15,000 from profits and £2,000 from capital
 £15,000 profit is made by the business

Capital Partner 1 Partner 2 Total

a/cs £ £ £
Bal b/d 10,000 20,000 30,000
Capital --
5,000 5,000
added
Capital -- (2,000) (2,000)
withdrawn
Bal c/d 15,000 18,000 33,000
 Partnership Example
The partnership agreements states:
 10% interest on capital earned on the amount of capital remaining at
the end of the year P1 = £1,500; P2 = £1,800;
 5% interest charged on profit withdrawn during the year, regardless of
when taken P1 = £500, P2 = £750

Capital Partner 1 Partner 2 Total

a/cs £ £ £
Bal b/d 10,000 20,000 30,000
Capital --
5,000 5,000
added
Capital -- (2,000) (2,000)
withdrawn
Bal c/d 15,000 18,000 33,000
 Partnership Example
The partnership agreements states:
 10% interest on capital earned on the amount of capital remaining at
the end of the year P1 = £1,500; P2 = £1,800;
 5% interest charged on profit withdrawn during the year, regardless of
when taken P1 = £500, P2 = £750

Appro- Partner 1 Partner 2 Total

priation a/c £ £ £
Profit 15,000
Int. on drawings (500) (750) 1,250
16,250
Int. on capital 1,500 1,800 (3,300)
 Partnership Example
Total share of profits =
The partnership agreements states: P1 £7,725, P2 £7,275
 Salary of £5,000 per annum paid to each
 Bonus to be calculated as % of revenue generated (£1,000 for partner 1
and £500 for partner 2 in 2021)
 Remaining profit shared equally between the two partners
Appro- Partner 1 Partner 2 Total
priation a/c £ £ £
Profit 15,000
Int. on drawings (500) (750) 1,250
16,250
Int. on capital 1,500 1,800 (3,300)
Salary 5,000 5,000 (10,000)
Bonus 1,000 500 (1,500)
1,450
PSR (50%:50%) 725 725 (1,450)
Profit per ptnr 7,725 7,275 --
 Partnership Example
Total share of profits =
Two partners are in a business P1 £7,725, P2 £7,275
 Partner 1 has £10,000 invested as capital and has £5,000 in profits
from previous years
 Partner 2 has £20,000 invested as capital and has £8,000 in profits
from previous years

Current Partner 1 Partner 2 Total

a/cs £ £ £
Bal b/d 5,000 8,000 13,000
Profit in
7,725 7,275 15,000
current year
 Partnership Example
During the year 2021:
 Partner 1 withdrew £10,000 from profits and added £5,000 to capital
 Partner 2 withdrew £15,000 from profits and £2,000 from capital
 £15,000 profit is made by the business

Current Partner 1 Partner 2 Total

a/cs £ £ £
Bal b/d 5,000 8,000 13,000
Profit in
7,725 7,275 15,000
current year
Withdrew
(10,000) (15,000) (25,000)
from profit
Bal c/d 2,725 275 3,000
 Exercise 4
£
Using the same balances as exercise 3, you are now Shop premises 45,000
informed that the business is a partnership, owned by Fixtures & fittings 4,000
Flea and Tick. Purchases 90,000
Trade receivables 15,300
Flea introduced £60,000 capital and had £13,425 in her Administration costs 55,000
current account at the start of the year. Sales 200,000
Stock as at 31/12/20 3,000
Tick introduced the remaining £40,000 and had £16,560
Vehicles 30,000
in his current account.
Drawings 11,200
During the year, Flea withdrew £6,000 and Tick has Selling & distribution costs 75,000
withdrawn £5,200. Profits (and losses) are shared Bank 5,500

equally between the two partners. Capital 100,000

Petty cash 985
Required: Retained profit 29,985
Construct an appropriation account and reconstruct the Trade payables 5,000

bottom half of the balance sheet, appropriate for the Closing stock valued at £5,000
partnership.
Solution
 Recap
 Statement of profit or loss
 To calculate profit / loss over a period of time, representing the performance of a business
 Features “revenues” minus “expenses”

 Statement of financial position

 Shows what is owned / controlled (resources) and what is owed (including to the owner(s)) at a point in
time
 Features “assets”, “liabilities” and “capital”
 Represents the accounting equation

 Sole traders & partnership

 Business assets used for personal use are “drawings” – a reduction of owner’s investment, not an
expense of the business
 Partnerships have
 additional appropriation account to show division of profit,
 current accounts showing the share and increases and decreases of individual partners’ profits, and
 capital account showing the share and increases and decreases of individual partners’ capital amounts
 Start and then Continue for Independent
Study:

 Dominoez

 SA Chan

 Brushe, Payperr and Paynte