Financial statements of a sole trader

Income Statement (also called Profit and Loss Account, or Trading and Profit & Loss Account):

• Shows financial performance over the accounting period.
• Heading: 'for the year ended [date]'.
• Two parts: Trading section (sales, COGS, gross profit) + Profit & Loss section (other income, expenses, profit for the year).

Statement of Financial Position (SOFP):

• Shows financial position at a specific date.
• Heading: 'as at [date]'.
• Shows assets, liabilities, capital.
• Must balance: Assets = Capital + Liabilities.

Standard format:

Key points:

• Use a TWO-column layout: working column for components, main column for totals.
• Always label subtotals (Net Sales, Cost of Sales, Gross Profit, Profit for the year).
• Apply all adjustments before final figures.

Standard SOFP format:

Non-Current Assets (3-column: Cost, Accumulated Depreciation, Carrying Amount)

• Premises, Machinery, Motor Vehicles, Fixtures and Fittings.

Current Assets

• Inventory (CLOSING figure at year-end)
• Trade Receivables less Provision for Doubtful Debts (net)
• Other Receivables (prepayments + income receivable)
• Bank (if in funds)
• Cash

= TOTAL ASSETS

Capital (full breakdown)

• Opening Capital
• • Profit for the year (or − Loss)
• − Drawings
• • Additional capital introduced
• = Closing Capital

Non-Current Liabilities

• Long-term loan, mortgage

Current Liabilities

• Trade Payables
• Other Payables (accruals + income in advance)
• Bank Overdraft (if applicable)

= TOTAL CAPITAL AND LIABILITIES

The two totals MUST be equal.

The five key adjustments:

1. Closing inventory — appears in IS (deducted from COGS) AND SOFP (current asset). Recorded by Journal: Dr Inventory (SOFP), Cr Inventory (IS).

2. Accruals and prepayments —

   • Accrued expense → IS expense ↑, SOFP current liability ↑.
   • Prepaid expense → IS expense ↓, SOFP current asset ↑.
   • Income receivable → IS income ↑, SOFP current asset ↑.
   • Income in advance → IS income ↓, SOFP current liability ↑.

3. Depreciation — IS expense ↑ by annual charge; SOFP non-current asset section shows Cost − Accumulated.

4. Irrecoverable debts — IS expense by write-off + change in provision; SOFP Trade Receivables ↓ + Provision deducted.

5. Adjustment to Provision for Doubtful Debts — only the CHANGE hits the IS; full balance sits on SOFP.

Each adjustment changes the income statement AND/OR the SOFP. Always check both.

1. Carriage inwards vs outwards — inwards is COGS; outwards is a separate selling expense.

2. Closing inventory — NOT in the TB; appears in BOTH IS and SOFP.

3. Drawings — NOT an expense; deducted from Capital on SOFP.

4. Depreciation — TWO accounts (Expense account + Accumulated). Asset stays at COST.

5. Provision for Doubtful Debts — only the CHANGE goes to IS; full balance on SOFP.

6. Other Receivables / Other Payables — show on SEPARATE lines from Trade items.

7. Bank balance direction — Dr (in funds) = current asset; Cr (overdraft) = current liability.

8. Capital section — show full breakdown, not just the total.