Final Accounts for Sole Proprietor

Introduction

The final accounts for a sole trader business are the Income Statement (Trading and Profit & loss
Account) and the Balance Sheet. The final accounts give a picture of the financial position of your
business. It shows where or not your business has made a profit or loss during the accounting period
and whether you are able to pay your debts as they become due. Let’s now have a look at the final
accounts of a sole proprietor business.

Objectives

Upon the completion of this topic you should be able to;

Final Accounts

After your trial balance is completed your final accounts are prepared. The final accounts of a sole
trader business include the Income Statement (trading and Profit & loss account) and the balance
sheet. Remember that your trial balance is the summary of the balances in all your accounts. Some
of these balances (those from your nominal accounts) affect the profit and are transferred to the
Income statement; the others (real and personal accounts) are transferred to your balance sheet.
The Income Statement and the Balance Sheet are prepared at the end of each financial period to
record how well the business operated during that financial period.

Income Statement
One of the most important financial statements of any business is the Income Statement. It is used
to determine the following:
1. how profitable a business is being run; and
2. comparing the results received with the results expected.

The Income Statement can be divided into two sections the trading account and the Profit & loss
account. The gross profit which is the amount of profit made before the expenses are deducted is
calculated in the trading account. The purpose of the trading account is to determine the gross profit
made from sales. Therefore, the accounts that are directly related to buying and selling (trading) will
be transferred to the trading account. The accounts directly related to trading are:

 Sales
 Purchase
 Wages
 Sales Return
 Purchases Return
 Carriage Inwards
 Opening & Closing stock
 Power & Fuel
Gross profit is calculated as:

Gross Profit = Net Sales – Cost of Goods Sold (COGS)

Along with gross profit the net sales, cost of goods sold (COGS) and the cost of goods available for
sale(COGAFS) is also calculated in the trading account:

Net Sales = Sales – Sales Return (Return Inwards)

Net sales are the total sales figure after allowances have been made for sales returned to the
business.

COGS = Cost of goods available for sale (COGAFS) – Closing Stock

COGAFS = Opening Stock + (Purchases – Purchases Return) + Carriage Inwards

The net profit of your business is calculated in the Profit & loss account. Net profit is the balance of
profit after allowance is made for revenue and expenses. It is calculated as:

Net Profit = Gross profit + Revenue – expenses

The revenue and expense charged to the Profit & loss account are those that are not directly related
to trading but more to do with the running of the business. Some of these accounts are:

 Rent

 Telephone

 Carriage outwards

 Discount allowed

 Discount received

 Commission received

 Commission paid

 Salary

 Advertisements

 Electricity

 Stationery

 Depreciation of assets

 Losses/Profit on sale of fixed assets

 Bad debts

 General Expenses
Balance Sheet

The other half of our final accounts is the Balance Sheet. The Balance Sheet is a financial statement
showing the book values of the assets, liabilities and capital at the end of the financial period as on a
particular date. It shows what the business owes and what it owns.
The assets of the business are divided into two categories and recorded as follows

1. Non-Current Assets are assets that:

 are expected to be of use in the business for long time;

 are to be used in the business; and

 were not bought only for the purpose of resale.

Non-current assets are recorded in the balance sheet starting with those assets that will in the
business the longest down to those that will be kept for a shorter period. Example of non-current
assets and the order of record are:

 Land and Buildings.

 Fixtures and Fittings.

 Machinery.

 Motor Vehicles.

2. Current Assets are recorded next. These are assets will change within the next twelve months.
They are recorded as follows:

 Stock (goods bought for resale)

 Debtors (Customers who purchased goods from you on credit).

 Cash at Bank.

 Cash in Hand.

3. Current Liability - are debts that will be settled in one year or less. This includes:

 Creditors
 Bills Payable
 Bank Overdraft
 Other small loans

4. Non-current Liability – They are also referred to as long term liability and are those debts that
take more than a year to redeem (pay back). This includes large loans - secured (collateral attached)
or unsecured.
5. Capital – This is what remains after you deduct liabilities from your (owner) assets. Capital
denotes owner’s investment into the business. Any profit incurred for the year belongs to the owner
and therefore added to the Capital. Similarly, any amount/goods withdrawn by the owner is treated
as drawings and deducted from the capital.

Let’s now prepare the final accounts from the trial balance on the below

Example 3.5A
MGR Retailer
Trial Balance as at 31 December 2011
Dr. Cr.
Rs Rs
Discount Allowed 410
Discount Received 506
Carriage Inwards 309
Carriage Outwards 218
Return Inwards 1,384
Return Outwards 810
Sales 120,320
Purchases 84,290
Stock 31 December 2010 30,816
Motor expenses 4,917
Repairs to premises 1,383
Pay 16,184
Sundry expenses 807
Rates and insurance 2,896
Premises at cost 40,000
Motor Vehicle at cost 11,160
Provision for depreciation motors as at 31 December 2010 3,860
Debtors 31,640
Creditors 24,320
Cash at bank 4,956
Cash in hand 48
Drawings 8,736
Capital 50,994
Loan from P. Holland 40,000
Bad Debts 1,314
Provision for bad debts as at 31 December 2010 658
241,468 241,468
The following should be considered on 31 December 2011
1) Stock Rs 36,420
a) Expenses owing
b) Sundry expenses Rs 62
2) Motor expenses Rs 33
3) prepayments
a) Rates Rs 166
4) Provision for bad debts to be reduced to Rs 580
5) Depreciation for motors to be Rs 2,100 for the year
6) Part of the premises were let to a tenant who owed Rs 250 at 31 December 2011
7) Loan interest owing to P. Holland, Rs 4,000

Prepare the Income Statement and Balance Sheet as at 31 December 2011.

Horizontal presentation of the Income Statement and Balance Sheet

MGR Retailer
Income Statement
for the year ended 31 December 2011
Rs Rs Rs Rs
Opening Stock 30,816 Sales 120,320
Add Purchases 84,290 Less Sales Returns 1,384 118,936
Less Purchases Return 810 83,480
Add Carriage Inwards 309
COGAFS 114,605
Less Closing Stock 36,420
COGS 78,185
Gross Profit c/d 40,751
118,936 118,936
Less Expenses Gross Profit b/d 40,751
Motor Expenses 4,917 Add Revenue
Add Motor expenses owing 33 4,950 Discount Received 506
Pay 16,184 Rent Receivable 250
Carriage Outwards 218 Reduction in Provision for Bad 78 834
Debts
Discount Allowed 410 41,585
Repairs to Premises 1,383
Sundry Expenses 807
Add sundry expenses owing 62 869
Bad Debts 1,314
Rates and Insurance 2,896
Less prepaid rates and 166 2,730
insurance
Loan Interest 4,000
Depreciation: Motor 2,100
Net Profit 7,427
41,585 41,585

MGR Retailer
Balance Sheet
as at 31 December 2011
Non-Current Assets Rs Rs Rs Capital Rs Rs Rs
Premises at cost 40,000 Balance as at 1 Jan 2011 50,994
Motor Vehicle at cost 11,160 Add Net Profit 7,427
Less Depreciation to date 5,960 5,200 58,421
45,200 Less Drawings 8,736
Current Assets 49,685
Stock 36,420 Non-Current Liability
Debtors 31,640 Loan from P. Holland 40,000
Less Provision for Bad Debts 580 31,060 89,685
Prepaid Expense 166
Revenue owing 250 Current Liabilities
Cash at bank 4,956 Creditors 24,320
Cash in hand 48 72,900 Expenses owing 4,095 28,415
118,100 118,100

Vertical presentation of the Income Statement and the Balance Sheet.

The vertical presentation is the most common method of presenting final accounts today. In the
vertical presentation of the balance sheet the working capital is indicated. This is calculated as:

Working Capital = Current Assets - Current Liabilities

The working capital indicates the liquidity of your business. This means the ability of your business to
pay its debts when they become due. It gives an idea of the amount of funds available to run the
business on a day to day basis.

MGR Retailer
Income Statement
for the year ended 31 December 2011
Rs Rs Rs
Sales 120,320
Less Sales Returns 1,384
Net Sales 118,936
Opening Stock 30,816
Add Purchases 84,290
Less Purchases Return 810 83,480
Add Carriage Inwards 309
COGAFS 114,605
Less Closing Stock 36,420
COGS 78,185
Gross Profit 40,751
Add Revenue
Discount Received 506
Rent Receivable 250
Reduction in Provision for Bad Debts 78 834
41,585
Less Expenses
Motor Expenses 4,917
Add Motor expenses owing 33 4,950
Pay 16,184
Carriage Outwards 218
Discount Allowed 410
Repairs to Premises 1,383
Sundry Expenses 807
Add sundry expenses owing 62 869
Bad Debts 1,314
Rates and Insurance 2,896
Less prepaid rates and insurance 166 2,730
Loan Interest 4,000
Depreciation: Motor vehicles 2,100 34,158
Net Profit 7,427

MGR Retailer
Balance Sheet
as at 31 December 2011
Non-Current Assets Rs Rs Rs
Premises at cost 40,000
Motor Vehicle at cost 11,160
Less Depreciation to date 5,960 5,200
45,200
Current Assets
Stock 36,420
Debtors 31,640
Less Provision for Bad Debts 580 31,060
Prepaid Expense 166
Revenue owing 250
Cash at bank 4,956
Cash in hand 48
72,900
Current Liabilities
Creditors 24,320
Expenses owing 4,095 28,415
Working Capital 44,485
89,685
Financed by
Balance as at 1 January 2011 50,994
Add Net Profit 7,427
58,421
Less Drawings 8,736
49,685
Non-Current Liability
Loan from P. Holland 40,000
89,685