Final Accounts of a Sole Trader: notes

Trading Account

• Purpose: Shows the gross profit by comparing sales with the cost of goods sold.
• Cost of sales: Opening stock plus purchases minus closing stock. Example: $2,000 plus $8,000 minus $1,500 = $8,500.
• Gross profit: Sales minus cost of sales. Example: $12,000 minus $8,500 = $3,500.
• Gross loss: Happens when cost of sales is more than sales.

Profit and Loss Account

• Purpose: Shows the net profit by taking expenses away from gross profit.
• Expenses: Costs of running the business, such as rent, wages and electricity.
• Net profit: Gross profit plus other income minus expenses. Example: $3,500 plus $200 minus $1,800 = $1,900.
• Net loss: Happens when expenses are more than gross profit plus other income.

Balance Sheet

• Purpose: A snapshot of what the business owns and owes on one date.
• Noncurrent assets: Items kept for long use, such as equipment, shown at cost minus depreciation. Example: $5,000 minus $1,000 = $4,000.
• Current assets: Items turned into cash within a year, such as stock and bank. Example: $1,500 plus $800 = $2,300.
• Current liabilities: Debts due within a year, such as creditors and bank overdraft.
• Long term liabilities: Debts due after a year, such as a bank loan of $4,000.

Capital, Drawings and Expenditure

• Capital: Money the owner puts into the business. Example: $10,000 invested.
• Drawings: Money the owner takes out for personal use. Example: $500 taken, which reduces capital.
• Closing capital: Opening capital plus net profit minus drawings. Example: $10,000 plus $1,900 minus $500 = $11,400.
• Capital expenditure: Spending on noncurrent assets, such as a van for $6,000. It appears in the balance sheet.
• Revenue expenditure: Day to day running costs, such as $300 for repairs. It goes to the profit and loss account.