LECTURE 1: THE FINAL ACCOUNTS (FINANCIAL STATEMENTS) OF A

SOLE TRADER

The main purpose of accounting is to inform business owners and interested parties about
the performance of a business for a particular period under review. For this purpose,
businesses prepare a set of statements called final accounts. The preparation of the final
accounts is not the first stage of an accounting cycle, but they are the final products of the
accounting cycle that is why, they are called final accounts. The final accounts comprise
of different statements depending on the type of business. Here, our focus will be on the
final account of sole traders, and it comprise of:
1. Trading Account: shows the results of the buying and selling of goods. It is prepared to
determine the gross profit or gross loss of a business. It should be noted that the result of
the business determined through trading account is not true result because the trading
account only accounts for the direct revenue and direct expenses for the period.
2. Profit and Loss Account: This account where annual net profit or loss of a business is
ascertained. Gross profit or loss of a business is ascertained through trading account and
net profit is determined by deducting all indirect expenses (business operating expenses)
from the gross profit through profit and loss account. Thus, profit and loss account starts
with the result provided by trading account.
3. Balance Sheet. is a list of the accounts having debit balance or credit balance in the ledger.
On one side it shows the accounts that have a debit balance and on the other side the
accounts that have a credit balance. The purpose of a balance sheet is to show a true and
fair financial position of a business at a particular date.

Note:
Carriage inwards refers to the cost of transporting purchases made by the business to its place
of storage. Hence this expense increases the cost of purchases. On the other hand, carriage
outward is the expenses of transporting the goods sold to the buyer’s premises. It is an expense
which is debited to the profit and loss account.

Format

XYZ’s
Income Statement (Trading Profit or Loss Account) for the year ended xx-xx-xxx
D D D
Sales / Turnover xxx
Less sales return/ return inwards xxx
Net Sales xxx
Less Cost of Sales:
Opening Stock xxx
Add purchases xxx
Carriage inward xxx
xxx
Less return outwards (xxx)

1
Net Purchases xxx
Cost of goods available xxx
Less closing stock xxx
Cost of goods sold xxx
Gross profit xxx
Less Expenses:
Salaries & wages xxx
Rent xxx
Discount allowed xxx
Advertisement xxx
Depreciation xxx
Total expenses xxx
NET PROFIT / LOSS xxx

XYZ’s
Statement of Financial Position (Balance Sheet as at xx-xx-xxx (vertical

COST ACC.DEP
Non-Current Asset (Fixed Asset) (D) (D) NBV (D)
Land xxx xxx xxx
Motor xxx xxx xxx
Total Non-Current Assets (Fixed Asset) xxx
Current Assets:
Stock xxx
Debtors xxx
Banks xxx
Cash xxx
Total current asset xxx
Less Current Liabilities:
Creditors xxx
Bank overdraft xxx
Total current liabilities xxx
Working capital xxx
Net Assets (Net worth) xxx
Financed by:
Capital xxx
Add net profit xxx
xxx
Less drawings xxx
xxx
Add long term liabilities:
Loan xxx
Capital Employed xxx

2
 Exercise 1:
1) The following trial balance was extracted from the books of BJ on 30th September 2012
DR CR
Sales 37200
Purchases 23112
Stock 1 October 2011 4776
Carriage outwards 752
Carriage inwards 468
Salaries & wages 4894
Motor expenses 1326
Return inwards 880
Return outwards 710
Rent 580
Motor vehicle at cost 4400
Fixtures & fittings at cost 600
Sundry expenses 2404
Creditors 6095
Debtors 8977
Cash at bank 12124
Cash at hand 200
Drawings 4200
Capital 25688
Total 69693 69693
Stock at 30 September 2012 was values at D5950

You are required to prepare a trading profit and loss account and a balance sheet for BJ as at
30th September 2012

FINAL ACCOUNTS OF A SOLE TRADER WITH ADJUSTMENTS

We have looked at a trading profit and loss account where sales is taken for a period and all
expenses for that period is deducted from it, thus the result being a net profit or loss. In this case,
we assume that the expenses belonged exactly to the period of the trading profit and loss
account. But you should be cognizant of the fact that the accountant is concern with revenue
earned and expenses incurred during the period and not the receipts and payments made.
Therefore adjustments are required for the following:
1) Revenues other than sales: most of the time we consider sales as the only revenue for the
business. There are other revenue such as sales commission received, rent sub lease,
discount received, decrease in provision etc. such revenues are added to the gross profit in
order not to understate the profit for the period.

3
 2) Accruals/Owings: these refer to services incurred during the period but not yet paid for as
at the time of extracting the final accounts. Such Owings are added back to the expenses in
the trading profit and loss account and under the current liability in the balance sheet.
3) Prepayments: refers to services paid for but not yet enjoyed. Such items are subtracted from
the expenses in the trading profit and loss account and added to the current assets in the
balance sheet.
4) Bad debts: refers to the debts that the business cannot recover. Bad debts are subtracted
from the expenses in the trading profit and loss account.
5) Provision for doubtful debts: this is money set aside against profit for doubtful debts.
Increase in provision is recorded under expenses in the trading profit and loss account and
deducted from the debtors in the balance sheet. While a decrease in provision is revenue,
it’s added to the gross profit in the trading profit and loss account.
6) Depreciation: is the measure of the wearing out, consumption or loss of valued of a fixed
asset and they are added to the expenses in the trading profit and loss account.
When we make such adjustments, we are applying one of the accounting principles known as
matching concept. This principle states that all revenues and expenses should be match in the year
in which they are incurred
Exercise 2:
The following trial balance was taken from the books of accounts of K.W.
Trail Balance as at 31st December, 2012
DR CR
Inventory 1/1/2012 46,000
Purchases 155,000
Returns 1,250 1,600
Cash 7,600
Bank 2,600
Freehold Premises 85,000
Office Equipment (1/7/2012) at cost 50,000
Fixtures and Fittings (cost D30,000) 25,000
Plant and Machinery (cost D75,000) 62,500
Delivery Van (cost D90,000) 82,000
Receivables and Payables 15,000 22,500
Discounts 2,500 5,300

4
Bad debts 3,750
Provision for bad debts 2,000
Wages 20,000
Rent, rates and insurance 1,600
Carriage inwards 1,200
Carriage outwards 950
Professional charges 2,500
Salaries 9,650
Capital 378,000
Rent Received 1,000
Drawings 6,500
Sales 155,000
Commission Received 10,000
578,000 578,000
Additional Information:
i) Inventory at 31st December 2012 was D52,000.
ii) Provision for bad debts is to be reduced by D500.
iii) A provision for discounts allowed is to be created at 2%.
iv) Provide for rent accrued D600.
v) D5,000 plant and Machinery purchased on 31 st December 2012 has been included in
purchases.
vi) Included in the insurance is an amount of D450 which is related to the following
year.
vii) No entry had been made in books for cash received from a debtor on 4th June 2012
payable to K.W for D750.
viii) It was discovered that cash sales of D9,000 had been completely omitted from the
books.
ix) Depreciation should be provided on cost per annum at the following rates:
Office Equipment 10%; Delivery Van 20%
Furniture & Fittings, 20% Plant & Machinery, 5%
You are to prepare:
a) Income statement for the year ended 31st December 2012 and
b) A statement of financial position as at 31st December, 2012.