FINANCIAL STATEMENTS OF A SOLE PROPRIETOR

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A sole proprietorship is a business owned, managed, and financed by a single individual known as the sole trader.

As is with all business organizations, A sole proprietor prepare financial statements.

The following are the two financial statements that a sole proprietor is most likely to prepare:

1. Statement of profit or loss (popularly called trading and profit and loss account)

2. Statement of financial position (popularly called a balance sheet).

We start with a statement of profit and loss.

Statement Of Profit Or Loss

This is a financial statement that shows a company's revenue and costs. Statement of profit and loss explains how a corporation converts revenue into net profit.

The statement of profit or loss is the financial statement that shows the financial performance of a business for a period of time.

The statement of profit and loss can be used to determine the net sales of a business, the net purchases, the cost of goods sold, the gross profit (or loss), net profit (or loss), etc.

It is important to note that only nominal accounts are entered in the statement of profit or loss. 

A nominal account is a temporary account that is only kept for one accounting period.

At the end of the accounting period, the balance on each of the accounts is carried to the statement of profit or loss for the purpose of determining profit or loss for the period.

The nominal accounts include all expenses, revenues, gains and losses.

Statement Of Financial Position

This is the financial statement that shows the assets, liabilities and equities of the business.

The accounting equation states that a company's assets are equal to the sum of its liabilities and owner's equity.

The statement of financial position is usually prepared using this idea of the accounting equation

Indeed, the statement of financial position is also called a balance sheet since it shows that assets must be balanced with the total liabilities and equities.

Usually, the balance sheet is usually prepared using this format

 Dr                  Balance sheet                       Cr
                       N                                                N
Capital          X   Assets (item by item)       X
liabilities      X
                       X                                                X

While nominal accounts are entered in the statement of profit or loss, Permanents accounts are entered in the statement of financial positions.

Permanent accounts are those accounts that keep continued balances over time.

The balances of permanent accounts are cumulative and are carried forward from one accounting period to the next as a permanent record of the financial positions of the business.

Asset, liability, and capital accounts are all permanent accounts.

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Conclusion

We have just discussed the financial statements of a sole trader. To refresh your memory, a sole trader usually prepares two financial statements. These are the statement of profit or loss and the statement of financial position.

While the statement of profit or loss shows the company's financial performance, the statement of financial position shows the relationship between the assets, liabilities and equity of the company.

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