Study Notes
Financial statements for a sole trader include the Income Statement and the Statement of Financial Position. These statements provide insights into the business's financial performance and position.
- Sole Trader — a business owned and operated by one person with unlimited liability. Example: Sarah runs a bakery and is responsible for all decisions and debts.
- Income Statement — shows profit or loss over a specific period by detailing revenue and expenses. Example: Revenue of 25,500, resulting in a profit of $8,200.
- Statement of Financial Position (SOFP) — lists assets, liabilities, and capital at a specific date. Example: Assets = Capital + Liabilities.
- Depreciation — allocation of an asset's cost over its useful life. Example: A van costing 6,000.
- Accrued Expenses — expenses incurred but not yet paid. Example: Electricity used in December but billed in January.
- Prepaid Expenses — expenses paid in advance for future periods. Example: Insurance paid in November covering the next 12 months.
- Irrecoverable Debts — debts that are certain to be uncollectable. Example: A customer owing $850 who has gone out of business.
- Provision for Doubtful Debts — estimate of debts that may become irrecoverable. Example: 2% of $50,000 trade receivables may not be paid.
Exam Tips
Key Definitions to Remember
- Sole Trader
- Income Statement
- Statement of Financial Position
- Depreciation
- Accrued Expenses
- Prepaid Expenses
- Irrecoverable Debts
- Provision for Doubtful Debts
Common Confusions
- Mixing up accrued and prepaid expenses
- Confusing gross profit with net profit
- Forgetting to adjust for goods taken by the owner
Typical Exam Questions
- What is a sole trader? A business owned and operated by one person.
- How do you calculate cost of sales? Opening inventory + Purchases - Closing inventory.
- What happens when goods are taken by the owner for personal use? Decrease purchases and increase profit.
What Examiners Usually Test
- Understanding of the accounting equation: Assets = Capital + Liabilities
- Ability to prepare and interpret income statements and SOFP
- Application of year-end adjustments like depreciation and accrued expenses