Final accounts of a sole trader
What the examiner tests
This section tests preparation of the trading account, profit and loss account and statement of financial position for a sole trader, including the link between profit, drawings and capital.
Core rules
- Trading account: net sales = sales − returns inwards. Cost of sales = opening inventory + purchases − returns outwards − closing inventory. Gross profit = net sales − cost of sales.
- Profit and loss: net profit = gross profit + other income − expenses. Expenses include carriage outwards, wages, rent, depreciation and provision movements.
- Capital: closing capital = opening capital + net profit − drawings. Profit is not a liability; drawings are not an expense.
- A sole trader does not prepare an appropriation account. The profit is added to capital. (Appropriation belongs to partnerships and companies.)
- Statement of financial position: non-current assets at carrying amount, current assets, capital, non-current liabilities and current liabilities.
Worked example
Sales N$70,000; returns inwards N$3,000; opening inventory N$8,000; purchases N$42,000; returns outwards N$2,000; closing inventory N$9,000; expenses N$12,000; drawings N$10,000; opening capital N$50,000. Net sales = 67,000. Cost of sales = 8,000 + 42,000 − 2,000 − 9,000 = 39,000. Gross profit = 28,000. Net profit = 16,000. Closing capital = 50,000 + 16,000 − 10,000 = 56,000.
Traps
Do not add returns outwards to purchases; they reduce purchases. Do not deduct closing inventory twice. Carriage inwards is part of cost of sales; carriage outwards is a profit and loss expense. Do not put drawings through profit and loss. Do not label a sole trader's profit as an appropriation.