Chapter 7

Preparation of a
Sole Trader’s
Financial Statements
 Two of the Most Important
Financial Statements

There are two main reports prepared for sole

traders. These are the:
• The Income Statement (also called a
Trading and Profit and Loss Account)
• The Balance Sheet
 Two of the Most Important
Financial Statements

An income statement is used to determine

whether a firm made a profit or loss for a
particular period. The money used up in
generating revenue is deducted from
money earned.
In a balance sheet, the firm presents its
assets, liabilities, and capital. It shows the
worth of the organisation at a particular
point
 A typical Income Statement

G. Trench
Income statement
For the year ended 31 March, 2007
$000 $000 $000
Sales 116751
Sales returns 251
Net Sales 116500
Cost of sales
Opening stock 1000
Purchases 22250
Carriage inwards 1500
Purchases returns 1120
Net purchases 22630
Closing stock 1500 22130
Gross Profit 94370
Other Income
Discounts received 200
Investment income earned 2500
97070
Expenses
Utilities 6256
Salaries 48000
Loan interest 150 54406
Net Income 42664
 A Typical Income Statement:
Gross Profit Calculation
Gross profit =
Net Sales - Cost of sales

Net Sales =
Sales - returns inwards (goods returned by customers)

Cost of Sales =
Opening stock + Net purchases -Closing stock

Net purchases =
Purchases + Carriage inwards (the cost of bringing
goods to our premises) - Returns outwards
 A typical Income Statement:
Net Profit Calculation

Net profit =
Gross profit + Other revenue earned -
Expenses
 A typical Balance Sheet
G. Trench
Balance sheet
as at 31 March, 2007
Fixed assets $000 $000 $000
Land and building 98000
Machines 10800
108800
Current assets
Inventory 1500
Debtors 3000
Short term investments 12000
Bank 42069
Cash 500
59069
Current liabilities
Creditors 1000
Bank overdraft 750 1750 57319
166119
Long term liabilities
Bank loan 3750
162369
Owner's equity
At start of the period 144705
Net income 42664
Drawings 25000
At end of the period 162369
 A Typical Balance Sheet:
Presentation of Working Capital

Working Capital=
Total Current Assets – Total Current Liabilities
Working capital tells the owner the extent to
which he can pay amounts due within a few
weeks or months.
 A Typical Balance Sheet:
Presentation of Working Capital
Current assets $
$
Inventory 1500
Short term investments 12000
Bank 40000
Cash 500 54000
Current liabilities
Bank overdraft 750 53,250
 Capital and
Revenue Expenditure
It is very important to know the difference between
capital expenditure and revenue expenditure.
Capital expenditure is any spending on fixed assets,
whether that is to purchase new fixed assets or to
extend fixed asset lives.
Revenue expenditure is any spending on goods and
services that facilitate daily business operations.
 Capital and revenue expenditure
Capital Expenditure
Purchase of motor vehicles
Installation of a new engine in a motor vehicle
Purchase of new computers
Testing and installation of new computers
Purchase of a warehouse to be used for the storage
of computers in a firm that sells computers
N.B. This will apply to manufacturers and retailers
of computers.
Acquisition cost of land
Purchase of new building
Revenue Expenditure
Maintenance costs of motor vehicles (e.g.
gasoline, oil, minor repairs)
Costs of changing spark plugs
Costs of cleaning computers
Costs of regular testing and maintenance of
computers
Purchase of computers for sale to customers.
N.B. This will apply to retailers of computers.
Regular cutting and clearing of grass on acquired
land
Electricity, water, and telephone rates; regular
cleaning, repairs and painting of a building