FINANCIAL STATEMENTS OF A SOLE TRADER

In order to ascertain the profit or loss made during a period, and to know the financial position of
the firm it is necessary on the final date of the period to close the books of account and prepare
financial statements. International Accounting Standard number 1 (IAS 1) covers the form and
content of financial statements to be prepared. The main components of financial statements as
explained by IAS 1 are;

1. Statement of Comprehensive Income/ Income statement

2. Statement of Financial Position/ Balance sheet
3. Statement of Cash flow
4. Statements of changes in Equity
5. Notes to the Financial Statements

The main elements of financial statements are as follows;

 Assets. Something a business owns or controls (e.g. Cash, Inventory, Motor vehicle, Plant
and machinery, etc) which have economic benefit that are expected to yield benefits in
future periods.
 Liabilities. Something a business owes to someone (e.g. Creditors, Bank loans, etc).
 Equity. This is the amount invested in a business by its owners, plus any remaining
retained earnings.
 Revenue. This is an increase in assets or decrease in liabilities caused by the provision
of services or products to customers. It is what the business has earned over a
period.(Examples are product sales and service sales)
 Expenses. The cost incurred by the business over a period (e.g. salaries and
wages, depreciation, rental charges, etc).

NOTE: Of these elements, Revenues and expenses are included in the income statement.
Assets, liabilities, and equity are included in the balance sheet.

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1. INCOME STATEMENT
What is income statement?
An income statement is a financial statement that shows you the company’s income and
expenditures. It also shows whether a company is making profit or loss for a given period.
The income statement, along with balance sheet and cash flow statement, helps you
understand the financial health of your business.

The income statement is also known as a profit and loss statement, statement of operation,
statement of financial result or income, or earnings statement.

Income statement major components;

Revenue or sales: This is the first section on the income statement, and it gives you a
summary of gross sales made by the company. Revenue can be classified into two types:
operating and non-operating. Operating revenue refers to the revenue gained by a company
by performing primary activities like manufacturing a product or providing a service. Non -
operating revenue is gained by performing non-core business activities such as installation,
operation, or maintenance of a system.

Cost of goods sold (COGS): This is the total cost of sales or services, also referred to as
the cost incurred to manufacture goods or services. Keep in mind that it only includes the
cost of products which you sell. COGS does not usually include indirect costs, like overhead.

Gross profit: Gross profit is defined as net sales minus the total cost of goods sold in your
business. Net sales is the amount of money you brought in for the goods sold, while COGS
is the money you spent to produce those goods.

Operating expenses: Operating expenses, operating expenditures, refers to the costs

incurred by a business for its operational activities. In other words, operating expenses are
the costs that a company must make to perform its operational activities in order to generate
revenue.

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 XYZ LIMITED COMPANY
INCOME STATEMENT FOR THE YEAR ENDED 31st DECEMBER 20XX
DETAILS TZS TZS TZS
Revenue/ Sales XXX
LESS: Return Inwards (XXX)
Net Sales XXXX

LESS: Cost of Goods Sold

Opening stock XXXX
ADD: Purchases XXXX
Add: Carriage Inwards XXXX
Less: Return Outwards (XXX)
Net Purchases XXXX
Cost of Goods Available for Sale XXXX
LESS: Closing Stock (XXX)
Cost of Goods Sold (XXX)
Gross Profit/ Loss XXXX
Add: Discount Received XXX
Add: Commission Received XXX
Total Gross Profit XXXX

LESS: Operating Expenses

Salaries and Wages XXX
Electricity XXX
Rent XXX
Discount Allowed XXX
Carriage Outwards XXX
Insurance XXX
Advertisement XXX
Interest Paid XXX
Commission Paid XXX
Bad Debts XXX
Total Expenses XXXX
Net Profit/ Loss for the period XXXX

Figure 1: Format for A statement of Comprehensive Income

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2. STATEMENT OF FINANCIAL POSITION
Statement of Financial Position, also known as the Balance Sheet, presents the financial position
of an entity at a given date. It is comprised of three main components: Assets, liabilities and equity.

Assets
An asset is something that an entity owns or controls in order to derive economic benefits from
its use. Assets must be classified in the balance sheet as current or non-current depending on
the duration over which the reporting entity expects to derive economic benefit from its use. An
asset which will deliver economic benefits to the entity over the long term is classified as non-
current whereas those assets that are expected to be realized within one year from the reporting
date are classified as current assets.

Liabilities
A liability is an obligation that a business owes to someone and its settlement involves the transfer
of cash or other resources. Liabilities must be classified in the statement of financial position as
current or non-current depending on the duration over which the entity intends to settle the liability.
A liability which will be settled over the long term is classified as non-current whereas those
liabilities that are expected to be settled within one year from the reporting date are classified as
current liabilities.

Equity
Equity is what the business owes to its owners. Equity is derived by deducting total liabilities from
the total assets. It therefore represents the residual interest in the business that belongs to the
owners.

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 XYZ LIMITED COMPANY
STATEMENT OF FINANCIAL POSITION AS AT 31st DECEMBER 20XX
DETAILS TZS TZS
ASSETS
NON CURRENT ASSETS
Motor vehicle XXXX
Land & Building XXXX
Furniture & Fittings XXXX
Premises XXXX
Plant & Machinery XXXX
Total Noncurrent Assets XXXX

CURRENTC ASSETS
Closing Stock XXXX
Goodwill XXXX
Debtors/ Account Receivables XXXX
Cash at Bank XXXX
Cash in Hand XXXX
Total Current Assets XXXX
TOTAL ASSETS XXXX

CAPITAL AND LIABILITIES

Equity/ Capital XXX
Add: Net Profit XXX
Less: Drawings (XX)
Net Capital XXXX

LIABILITIES
NONCURRENT LIABILITIES
Long term Loan XXX
Bonds XXX
Debentures XXX
Total Noncurrent Liabilities XXXX

CURRENT LIABILITIES
Creditors/ Account payable XXX
Bills payable XXX
Bank overdraft XXX
Short term loan XXX
Total Current Liabilities XXXX
TOTAL CAPITAL AND LIABILITIES XXXX

Figure 2: Format for A statement of Financial Position

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Example 1
The following balances are taken from the books of Chuma Dudu at the end of his first year
trading on 31 December 2020

DETAILS DEBIT CREDIT

Sales 4,000
Purchases 1,850
Salaries and Wages 510
Rent 130
Electricity 90
Advertisement 120
Insurance 80
Cash at Bank 220
Cash in Hand 130
Trade receivables 410
Trade payables 340
Furniture 3,000
Premises 1,000
Motor vehicle 800
Capital at 1st January 5,200
Drawings 1,200
Total 9,540 9,540

The following additional information is available:

Inventory at 31st December 2020 was valued at Tshs 450

Required:
(a) Prepare income statement for the year ended 31 December 2020

(b) Prepare a balance sheet as at 31 December 2020

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QUESTION 1
From the following information, draw up the statement of comprehensive income of Mr. Kanyaga
twende for the year ended 31 December 20X7 which was his first year in business.

Carriage inwards 980

Return outwards 840

Return inwards 1,290

Sales 162,918

Purchases 121,437

Stock of goods: 31 December 20X7 11,320

QUESTION 2
The following information is available for the year ended 31 March 20X8. Prepare a trading and
loss accounts for that year.

Stock of goods: 31 March 20X8 52,400

Return inwards 16,220

Return outwards 19,480

Purchases 394,170

Carriage inwards 2,490

Sales 469,320

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QUESTION 3
Mchizi Boti drew up the trial balance as at 30 September 20X8. You are to draft the Statement of
Performance for the year ended 30 September and Statement of Position as at that date.

DETAILS DEBIT CREDIT

Capital 49,675
Drawings 28,600
Cash at bank 4,420
Cash in hand 112
Account receivables 38,100
Account payables 26,300
Stock 30 September 20X7 72,410
Van 5,650
Office Equipment 7,470
Sales 391,400
Purchases 254,810
Returns inwards 2,110
Carriage inwards 760
Returns outwards 1,240
Carriage outwards 2,850
Motor expenses 1,490
Rent 8,200
Telephones charges 680
Wages and Salaries 39,600
Insurance 745
Office expenses 392
Sundry expenses 216
468,615 468,615

Stock at 30 September 20X8 was 89,404

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QUESTION 4
The following is the trial balance of DSJ as at 31 March 20X9. Draw up a set of financial
statements for the year ended 31 March 20X9.

DETAILS DEBIT CREDIT

Sales 210,420
Purchases 108,680
Stock 1 March 20X6 9,410
Carriage outwards 1,115
Carriage inwards 840
Returns 4,900 3,720
Salaries and wages 41,800
Motor expenses 912
Rent 6,800
Sundry expenses 318
Motor vehicle 14,400
Fixture and fittings 912
Debtors 23,200
Creditors 14,100
Cash at Bank 4,100
Cash in Hand 240
Drawings 29,440
Capital 18,827
247,067 247,067

Stock at March 20X9 was 11,290

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QUESTION 5
From the following trial balance of Kwangu pakavu, extracted after one year of operations,
prepare Income statement for the year ending 30 June 20X3, together with balance sheet as at
that date.

DETAILS DEBIT CREDIT

Sales 35,800
Purchases 14,525
Salaries 2,325
Motor expenses 9,300
Rent and business Rates 1,250
Insurance 1,950
Motor vehicles 10,000
Fixtures 17,500
Cash in Hand 500
Cash at bank 1,250
Drawings 12,000
Long-term-Loan 15,000
Capital 19,275
Debtors 11,725
Creditors 9,750
81,075 81,075

Stock on 30 June 20X3 was 3,000

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