Sole Trader (Part 2) Flashcards
[Sole Trader]
Reasons of incomplete records
- No specialty/No accounting knowledge
- Costly and time consuming
- Due to fire/flood
[Sole Trader]
Capital and profit or loss
- Asset = Capital + Liabilities
- Capital = Asset - Liabilities
- Capital = Net Asset
[Sole Trader]
Ledger Accounts
- Purchases ledger control account
- Sales ledger control account
- Cash account
- Accrued and prepaid, income and expenses
[Sole Trader]
Non-current assets
- Net book value = Cost - Accumulated depreciation
- Profit/Loss on disposal = NBV - Sales proceed
[Sole Trader]
Mark-up ratio
Cost of sales = 100%
[Sole Trader]
Margin ratio
Revenue = 100%
[Sole Trader]
Cheryl makes up her accounts at 31 December each year and values her closing inventory at selling price.
She purchased goods for $800 on 30 November 2013. She sold the goods on 30 January 2014 for $1,000. If these were Cheryl’s only transactions, prepare the trading section of her statement of profit or loss for the years ended 31 December 2013 and 2014.
Why selling price cannot be included as the inventory valuation? [hint: 3 concepts]
1) Realisation
- Profit should not be realised in the year ended 31 December 2013 because no sale had taken place.
2) Matching
- The profit has not been matched to the time the sale took place.
- Accounts for profit in 2013 when they were actually sold in 2014.
3) Prudence
- Valuing the inventory at selling price has ↑ its value, which understates cost of sales and overstate profit.
- There is no guarantee that the goods could be sold for a profit.
[Sole Trader]
Definition of IAS 2 inventories
- Inventories are required to be valued at the LOWER of cost AND net realisable value.
- Application of the prudence
[Sole Trader]
Advantages of maintaining a full accounting records
1) Facilitates preparation of financial statements.
- More control and monitoring over business performance
2) Provide more comprehensive information to inform decision making.
- Maximise opportunities
3) Financial information will be more reliable/ accurate.
- Improve accuracy and reduce errors
4) Helps guard against fraud.
- Inventory losses or cash losses can be identified earlier, and corrective action taken.
[Sole Trader]
Disadvantages of maintaining full accounting records
1) May not have time/ skills to maintain full accounting records.
2) Possible cost of employing bookkeeper.
3) Possible additional expenditure on equipment/accounting software/training.
- Reduce profitability
[Sole Trader]
Internal stakeholders
1) Owner
- Direct involvement in the day-to-day running and management of business.
- Assess overall performance.
- Make decision whether to expand or discontinue (part of) business.
2) Existing shareholders
- Not generally involved in the day-to-day running of the business.
- Assess overall performance – level of profit will have a major impact on the size of any dividends and the share price.
- Determine how well the directors have been looking after the company.
3) Manager and directors
4) Employees
[Sole Trader]
External stakeholders
1) Lenders
- Help determine whether a loan or overdraft should be granted to the business.
-If granted, assess the ability to repay them.
2) Potential shareholders
- To make decisions on whether or not to invest in the business.
- Assess whether the business is likely to provide a good return on their investment.
3) Suppliers
- Decide whether credit facilities should be granted to the business.
- If granted, financial statements will provide an indication as to whether they are likely to be paid.
4) Customers
5) Government
6) Local community
7) Trade unions
