recognise and define the content of a statement of financial position: non-current assets, intangible assets, current assets, current liabilities, non-current liabilities and capital
5.1 Sole Traders – Statement of Financial Position (SFP) and Income Statement
1. What is a sole‑trader?
A business owned and run by one person.
For legal purposes the owner = the business, so the owner is personally liable for all debts.
1.1 Advantages of a sole‑trader
Full control – the owner makes every decision.
All profits belong to the owner.
Simple & cheap to set up – few statutory requirements.
Easy to dissolve when the owner wishes.
Why it matters: These factors make the sole‑trader model attractive for low‑risk, start‑up ventures.
1.2 Disadvantages of a sole‑trader
Unlimited personal liability – personal assets can be used to settle business debts.
Limited capital – finance depends on the owner’s savings and borrowing capacity.
Business continuity – the business ends or must be sold when the owner retires or dies.
Limited skills – the owner may have to perform many unrelated tasks.
Why it matters: High risk and financing constraints influence the decision to choose another legal form (e.g., partnership or limited company).
2. Types of sole‑trader business
Type
Typical activities
Key accounting feature
Trading sole‑trader
Buy‑sell of goods (shop, wholesaler, online retailer)
Stock and Cost of Goods Sold (COGS) appear in the accounts.
No stock – revenue is recorded directly from services rendered.
3. Why prepare financial statements?
Income Statement (Profit & Loss Account) – shows how much profit (or loss) the business made over a period (usually one year). It helps the owner assess performance and decide whether to expand, cut costs, or change pricing.
Statement of Financial Position (Balance Sheet) – shows the financial standing at a single date. It tells the owner, lenders and other users whether the business is solvent, how much capital is invested and how assets are financed.
4. Link between the two statements
Net profit from the Income Statement increases capital (owner’s equity).
Capital (end) = Capital (begin) + Net profit – Drawings
Drawings (money taken by the owner for personal use) decrease capital.
Year‑end adjustments (depreciation, accruals, prepaid items, bad debts, goods taken by owner) affect both statements.
5. Content of a Statement of Financial Position
The SFP must always satisfy the accounting equation:
Cash & bank, stock, trade receivables, prepaid expenses
≤ 1 year
Current liabilities
Trade payables, bank overdraft, tax payable, accrued expenses, short‑term loans
≤ 1 year
Non‑current liabilities
Long‑term bank loans, hire‑purchase obligations, mortgage
> 1 year
Capital (owner’s equity)
Owner’s initial & additional investments, retained profit, less drawings
—
6. Year‑end adjustments (must be recorded before the final statements)
Depreciation – spreads the cost of non‑current assets over their useful lives. Depreciation expense appears in the Income Statement; accumulated depreciation reduces the carrying amount of the asset in the SFP.
Accrued expenses – costs incurred but not yet paid (e.g., wages, interest). Recorded as a current liability and as an expense.
Prepaid expenses – payments made in advance for services to be received later (e.g., insurance). Recorded as a current asset and deducted from expense.
Accrued income – revenue earned but not yet received (e.g., services performed on credit). Recorded as a current asset and as revenue.
Irrecoverable debts – trade receivables that are unlikely to be collected. Written off as an expense; the receivable is removed from assets.
Goods taken by the owner for personal use (drawings of stock) – Reduce stock (current asset) and reduce capital.
7. Examples of Income Statements
7.1 Trading sole‑trader (includes stock & COGS)
ABC Trading – Income Statement
Year ended 31 Dec 2025
Sales (credit)
£68,000
Less: Cost of Goods Sold
£30,000
Gross profit
£38,000
Depreciation (plant & machinery)
£3,000
Wages (accrued)
£4,500
Rent (paid)
£2,400
Bad debts written‑off
£500
Net profit for the year
£27,600
7.2 Service sole‑trader (no stock, no COGS)
XYZ Services – Income Statement
Year ended 31 Dec 2025
Fees earned (credit)
£45,000
Depreciation (computer equipment)
£1,200
Wages (accrued)
£5,800
Rent (paid)
£3,600
Net profit for the year
£34,400
8. Full set of accounts – Trading sole‑trader example
All figures are in £ and refer to the year ended 31 December 2025.
8.1 Income Statement (re‑produced for reference)
8.2 Statement of Financial Position (as at 31 December 2025)
ABC Trading – Statement of Financial Position
Non‑current assets
Land and buildings
£45,000
Plant & machinery (cost £30,000 less accumulated depreciation £3,000)
£27,000
Intangible assets
Goodwill
£5,000
Current assets
Stock (ending)
£12,000
Trade receivables (after writing‑off £500)
£7,500
Prepaid insurance
£600
Cash and bank
£4,500
Total assets
£121,600
Current liabilities
Trade payables
£6,000
Bank overdraft
£2,500
Accrued wages
£4,500
Non‑current liabilities
Long‑term bank loan
£20,000
Total liabilities
£33,000
Capital (owner’s equity)
£88,600
Check of the accounting equation: £121,600 = £33,000 + £88,600 ✔
9. Key points to remember
The owner and the business are the same legal entity – unlimited personal liability.
Two statements are required each year: an Income Statement (performance) and a Statement of Financial Position (financial standing).
Net profit increases capital; drawings decrease capital.
All items must be classified as current (≤ 1 year) or non‑current (> 1 year).
Intangible assets are listed separately from physical non‑current assets.
Year‑end adjustments (depreciation, accruals, prepaid items, bad debts, owner‑drawings of stock) must be recorded before the final statements.
The SFP must always balance: Assets = Liabilities + Capital.
Suggested diagram: a simple block diagram showing “Assets” on the left, “Liabilities” and “Capital” on the right, with arrows indicating “Assets = Liabilities + Capital”.