Final Accounts of a Sole Trader

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  • 0:04 Sole Trader/Proprietor
  • 0:47 Final Accounts
  • 1:23 Trading & Profit/Loss Account
  • 3:36 Balance Sheet Account
  • 4:55 Lesson Summary
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Lesson Transcript
Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

This lesson will guide you through the creation of statements of account for a sole trader/proprietor. We will walk through the creation of a trading account, profit and loss account, and balance sheet.

Sole Trader/Proprietor

Anjan is the only owner of a family shop that sells sundries and other goods. His family has owned the business for three generations; he takes pride in his shop and has a great relationship with his customers. His only complaint would be the accounting! Every year he prepares final accounts for the year.

Let's help him prepare the final accounts of his business. After working through the examples, a challenging process should become a little more clear.

Anjan's shop is a sole proprietorship and he is single owner and operator (sometimes called trader). This type of business is the most common.

At the end of the year, he needs to prepare financial statements, regardless of his love of accounting (or lack thereof!).

Final Accounts

In order to make Anjan's life a little easier, let's provide him with a trial balance of accounts. Within the balance are things like inventory, purchases, sales, expenses, etc. Note that the ''debtors'' item refers to people that owe him money.

Item Debit Credit
Inventory January 2017 1,00,000
Purchases 2,25,000
Sales 3,75,000
Store Expenses 5,000
Interest Paid 1,250
Facilities 1,38,250
Wages 45,000
Debtors 10,000
Cash 1,000
Rent Paid 1,250
Utilities 500
Capital 65,000
Creditors 12,750
Loans 1,00,000
5,40,000 5,40,000

As part of the final accounts, Anjan is going to know if he made any money (and a profit). Even though some of these calculations will get complex, just remember the following will be true:

  • A net profit (or loss) equals income minus expenses.

Now that we have the trial balance, let's see if Anjan made a profit in the last year.

Trading And Profit and Loss Account

Yes, there are two kinds of profit. Gross profit is what the shop made for profit. Net profit is what Anjan made; if he clears a net profit he can stay in business.

Since we need to report BOTH gross profit and net profit, we have two accounts. The trading account gives us the gross profit, while the profit and loss account shows net profit. Even though they are separate accounts, you need one (gross profit) to get the other (net profit).

Let's start with the trading account.

Trading Account

Recall that the trading account is used to show gross profit. Anjan will need the following figures to calculate his sales and subtract the cost of those sales. This will give him the gross profit.

The following table explains each item he needs for the trading account.

Item Description/Formula
Sales and Purchases Anjan can only use sales and purchases used in the conduct of the shop. He can't put a new front door here, but he can log the groceries he sells
Cost of Sales Opening inventory + Purchases - Closing Inventory
Gross Profit Sales - Cost of Sales
Overhead Expenses incurred to run the business (wages, rent, etc.)

There's just one more thing (at least for this piece!). Anjan's store had a closing inventory of $9,750,000. We will need that when we create the trading account.

Trading Account

Item Debit Credit
Sales 3,75,000
Opening Inventory 1,00,000
Purchases 2,25,000
Minus Closing Inventory 9,75,000
Cost of Sales 2,95,000
Gross Profit 80,000

Now that we have the trading account built, we can work on the profit and loss account.

Profit and Loss Account

If Anjan has a gross loss, the net loss won't be any prettier. Thankfully, he shows a gross profit, so there is hope for the profit and loss account. Remember, this statement shows the net profit (or loss).

The profit and loss account subtracts all the overhead from Anjan's shop (wages, expenses, rent, etc.). These items should be familiar from the trial balance we had nicely prepared for him.

Profit and Loss Account

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