Chapter 13 - Sole Trader Financial Statements

Question 1

Capital account

Answer 1

The capital account shows the sole traders stake in the business. It records:

Opening capital at the start of the year

Plus capital added during the year

Plus profit for the year or minus loss for the year

Minus drawings taken in form of cash, goods or services by the owner during the year

Question 2

Financial statements: the adjustments

Answer 2

Adjustments are made in order to:

Present a more relevant and faithful representation of profit, and assets and liabilities

Enable comparisons to be made with financial statements from previous years

Enables users of financial statements to understand and be assured of the information given

Question 3

Summary of year end adjustments for financial statements

Answer 3

Closing inventory - deduct from purchases in spl, current asset in sfp

Accrual of expense - add to expense in spl, current liability in sfp

Prepayment of expenses - deduct from expense in spl, current asset in sfp

Accrual of income - add to income in spl, current asset in sfp

Prepayment of income - deduct from income, current liability in sfp

Depreciation charge - expense in spl, non current assets reduced by accumulated depreciation to give carrying amount in sfp

Irrecoverable debts - expense in spl, deduct from trade receivables in sfp

Disposal of non current asset - expense if loss/ income if gain on disposal in spl, non current assets reduced by disposal in sfp

Creation or increase in allowance for doubtful receivables - added to expenses in spl, trade receivables figure reduced by total amount in sfp

Decrease in allowance for doubtful receivables - income in spl, trade receivables figure by total amount of allowance in sfp

Goods or services taken by the owner for own use - deduct from purchases in spl, add to drawings in sfp

Question 4

Cost of sales account

Answer 4

Debit opening inventory and purchases

Credit purchase returns if any and closing inventory