Financial Statements of Sole Proprietors
Financial Statements of Sole Proprietors
This domain tests the income statement and statement of financial position of a sole trader, including capital account movements and classification of assets and liabilities. Questions often supply a trial balance and require adjustments.
Core rules
- Income statement: Sales - Cost of sales = Gross profit; Gross profit + other income - expenses = Net profit.
- Cost of sales = Opening inventory + Purchases - Closing inventory.
- Statement of financial position: Assets = Capital + Liabilities.
- Closing capital = Opening capital + Net profit - Drawings.
- Classify assets and liabilities as non-current or current. Working capital = Current assets - Current liabilities.
- Drawings are deducted from capital, not shown as an expense.
Worked example
Sales RM80,000; opening inventory RM10,000; purchases RM50,000; closing inventory RM12,000. Cost of sales = RM10,000 + RM50,000 - RM12,000 = RM48,000. Gross profit = RM32,000. Expenses RM18,000 give net profit RM14,000. Opening capital RM40,000 less drawings RM9,000 plus net profit RM14,000 gives closing capital RM45,000. If current assets are RM30,000 and current liabilities RM12,000, working capital is RM18,000.
Traps
- Treating drawings as an expense.
- Omitting closing inventory from cost of sales.
- Including a loan as capital rather than a liability.
- Mixing current and non-current classifications.
Key points
- Cost of sales includes opening and closing inventory
- Net profit increases capital
- Drawings reduce capital
- Assets equal capital plus liabilities
- Working capital is current assets less current liabilities