Final Accounts of Sole Traders
Structure of the final accounts
A sole trader prepares a trading account and a profit and loss account, often combined as an income statement, plus a statement of financial position. The trading account finds gross profit: Sales − Cost of goods sold, where cost of goods sold = Opening inventory + Purchases + Carriage inwards − Returns outwards − Closing inventory. The profit and loss account then deducts expenses to find net profit.
The statement of financial position
This lists assets, liabilities and capital. Capital is increased by net profit and capital introduced, and reduced by drawings and net loss. Non-current assets appear at cost less accumulated depreciation.
Traps to watch
Do not include carriage outwards in cost of goods sold - it is a selling expense. Carriage inwards is part of cost. Returns inwards reduce sales; returns outwards reduce purchases. Do not deduct drawings as an expense in the profit and loss account - drawings reduce capital. Closing inventory appears in both the trading account and the statement of financial position. Also, distinguish gross profit from net profit.
Rule of thumb
Build cost of goods sold in this order: opening inventory + purchases + carriage inwards − returns outwards − closing inventory. Then subtract from sales.
Worked example
Opening inventory $1,000; purchases $6,000; carriage inwards $200; returns outwards $300; closing inventory $1,200. Cost of goods sold = 1,000 + 6,000 + 200 − 300 − 1,200 = $5,700. If sales are $9,000, gross profit = $3,300.