Sole Traders - Part 2

The statement of financial position (SFP), historically called the balance sheet, reports a sole trader's financial position at a specific point in time — for example, 'as at 31 December 2026'. This is fundamentally different from the income statement, which covers an entire period.

The SFP is organised around the accounting equation:

Assets = Capital + Liabilities

or, rearranged:

Net assets = Capital

Everything on the left side (assets) must equal everything on the right side (capital plus liabilities). If the SFP does not balance, there is an error somewhere.

The Cambridge format presents the SFP vertically (not in the horizontal 'T' format). The structure is:

1. Non-current assets
2. Current assets
3. Less: Current liabilities → gives Working capital
4. Add: Non-current assets + Working capital
5. Less: Non-current liabilities → gives Net assets
6. Capital section (must equal Net assets)

Examiners award marks for format as well as figures. Always use the vertical format with clear headings, and make sure Net assets equals closing capital.

Non-current assets are assets that the business expects to use for more than one accounting period. Common examples for a sole trader include:

• Land and buildings
• Plant and machinery
• Motor vehicles
• Fixtures and fittings
• Equipment

Each non-current asset is shown in three columns in the Cambridge format:

                              Cost   Accum. depreciation   Carrying amount
                               $              $                  $
Land and buildings         50 000              —              50 000
Motor vehicles             24 000          9 600              14 400
Fixtures and fittings       8 000          3 200               4 800
Total non-current assets   82 000         12 800              69 200

• Cost: the original purchase price of the asset (never changes unless the asset is disposed of).
• Accumulated depreciation: the total depreciation charged on the asset from the date of purchase to the current date. This is the running total of all previous years' depreciation plus the current year's charge.
• Carrying amount (net book value, NBV): Cost − Accumulated depreciation. This is what the asset is stated at on the SFP.

Important: Land is NOT depreciated (it does not wear out or become obsolete). If the exam question shows land separately, its accumulated depreciation column is blank or zero.

The carrying amount does NOT represent the market value of the asset — it is an accounting figure only.

Current assets are assets expected to be converted into cash (or used up) within 12 months. They are listed in order of decreasing liquidity (how quickly they can be converted to cash — least liquid first):

1. Inventory (least liquid — must first be sold, then collected)
2. Trade receivables — shown net of the provision for doubtful debts
3. Other receivables — includes prepaid expenses + accrued income
4. Bank (if a positive balance)
5. Cash (most liquid)

Trade receivables on the SFP:

Trade receivables                     5 000
Less: Provision for doubtful debts     (200)
                                      4 800

Current liabilities are amounts due for payment within 12 months:

• Trade payables (amounts owed to suppliers)
• Bank overdraft (a negative bank balance — a liability)
• Other payables: accrued expenses + income received in advance
• Short-term portion of loans
• Proposed dividends (if not yet paid)

Working capital = Current assets − Current liabilities

Working capital measures the business's short-term liquidity — its ability to pay debts as they fall due. If working capital is negative (current liabilities > current assets), the business may struggle to pay short-term debts.

Non-current liabilities are amounts owed for repayment after more than 12 months. Common examples:

• Long-term bank loans
• Mortgages

These are listed below working capital and deducted to arrive at Net assets.

The capital section occupies the bottom of the SFP and must always equal Net assets:

Capital
  Opening capital (capital at start of period)    X
  Add: Net profit for the year                    X
  Add: Additional capital introduced              X
  Less: Drawings                                 (X)
Closing capital                                   X

• Opening capital: this equals the closing capital from the previous year's SFP. It is also what was shown on last year's SFP as the total capital figure.
• Net profit: taken from the income statement for the current year. If there is a net loss, it is deducted.
• Drawings: amounts the owner has taken out of the business for personal use (cash or goods). Drawings reduce capital; they are NOT an expense in the income statement.
• Additional capital: any new money the owner has invested during the year.

Closing capital must equal Net assets. If these two figures are not equal, there is a calculation error somewhere. This is the built-in check of the SFP.