Final Accounts for Sole Traders

1. What are Final Accounts?

Definition: Final accounts = two statements a sole trader prepares at year end:

1. Income Statement — shows profit or loss earned in a period (old name: Trading & Profit and Loss Account)
2. Statement of Financial Position (SOFP) — shows assets, liabilities & capital on one date (old name: Balance Sheet)

① Old name → new name (use the NEW ones!)

Old term	New term (CAIE)	Old term	New term (CAIE)
Stock	Inventory	Debtors	Trade receivables
Creditors	Trade payables	Balance sheet	Statement of financial position
Trading & P&L a/c	Income statement	Net profit / net loss	Profit / loss for the year
Sales return	Return inwards	Purchases return	Return outwards
Bad debt	Irrecoverable debt	Customs duty	Import duty
Sales	Revenue (same thing)	Owing	Accrued (same thing)

Note: sir said the examiner now often writes "sales returns" and "purchases returns" instead of return inwards / outwards — they mean the same. "Goods returned by customers" = return inwards; "goods returned to suppliers" = return outwards.

② Period vs point in time — "for the year ended" vs "as at"

• Income statement can be for a year, 6 months, a quarter or a month — always a period.
• SOFP is made at one date: shows assets, liabilities and capital "as of today".
• Heading (if not given): owner's name → name of statement → for the year ended / as at + date. 1 mark if you must write it; if the question already gives it, skip it.
• The money columns are not debit / credit — only for presentation.

③ The accounting equation behind the SOFP

Other forms exist (A − L = C) but the format used in exams is A = C + L. If total assets = total capital & liabilities, the SOFP is balanced.

2. Income Statement — the Format

Two columns: put anything that must be added / subtracted in the first column and the sub-totals / final answers in the second column. (Below: ARD Traders, y/e 31 Dec 2021 — as on the board.)

ARD — Income Statement for the year ended 31 Dec 2021	$	$
Sales (Revenue)	XX
Less: Return inwards	(XX)	XX
Less: Cost of sales
Opening inventory	XX
Add: Purchases	XX
Less: Return outwards	(XX)
Add: Carriage inwards	XX
Add: Import (customs) duty	XX
Less: Drawing of goods	(XX)
Less: Closing inventory	(XX)
Cost of sales		(XX)
Gross profit		XX
Add: Other income
Rent received / receivable	X
Commission / Discount received	X
Decrease in provision for doubtful debts	X
Debts recovered  ·  Gain on disposal of NCA	X	XX
(the "no-name" figure: gross profit + other income)		XX

(continued) Expenses	$	$
Less: Expenses
Irrecoverable debt (bad debt)	X
Increase in provision for doubtful debts	X
Discount allowed	X
Carriage outwards	X
Rent / Electricity / Heat & light / Insurance / Sundry	X
Salaries & wages · Repairs & maintenance	X
Loan interest (financial cost)	X
Loss on disposal of NCA	X
Depreciation	X	(XX)
Profit for the year / (Loss for the year)		XX / (XX)

Item-by-item — what each line means and where it goes

Sales (revenue): selling price of all goods sold in the year — cash + credit sales both.

Return inwards: goods returned by customers (faulty, wrong size / quality / specification, no longer needed) → deduct from sales.

Cost of sales = what the goods we sold actually cost the business. Build it step by step:

Item	Rule / reason
Opening inventory	stock at the start of the year = last year's closing inventory. In the list of balances the inventory is always the opening one.
+ Purchases	all goods bought — cash and credit.
− Return outwards	goods returned to suppliers (same reasons). Mirror image: return inwards come off sales, return outwards come off purchases.
+ Carriage inwards	transport cost of bringing goods in from the supplier — it raises the cost of goods, so it is added.
+ Import (customs) duty	govt. levy when importing — also part of cost, so added.
− Drawing of goods	owner takes goods for own use → not a cost of the business, so deducted.
− Closing inventory	unsold goods left at year end — they will be sold next year, so do not charge them this year. In the notes inventory is always the closing one.

Gross profit = net sales − cost of sales. It is not the final profit — it is an intermediate profit that still needs two adjustments: other income and expenses. ("Friends say you earn a lot, but I still have to cover all my business expenses.")

Other income = income not from buying & selling goods. Rule of thumb: anything that ends in "received" / "receivable":

• Rent received (or receivable — same thing) · Commission received · Discount received
• Decrease in provision for doubtful debts (provision fell ⇒ good news ⇒ income)
• Debts recovered (bad debt recovered — a customer who had gone bankrupt pays full or part)
• Gain on disposal of a non-current asset (sold for more than its book value)

Expenses — every cost needed to run the business: salaries & wages, rent, insurance, heat & light / electricity, sundry / general / miscellaneous, advertising, repairs & maintenance, depreciation, discount allowed (we give customers a discount when they pay early — expense; mirror of discount received), carriage outwards, irrecoverable debt (always an expense), increase in provision for doubtful debts, loan interest (financial cost) and loss on disposal (always expenses). The list is not exhaustive.

Quick sort — income or expense?	Goes under
Provision for doubtful debts ↑ (increase)	EXPENSE
Provision for doubtful debts ↓ (decrease)	OTHER INCOME
Disposal: sold for more than NBV → gain	OTHER INCOME
Disposal: sold for less than NBV → loss	EXPENSE
Discount received (from suppliers)	OTHER INCOME
Discount allowed (to customers)	EXPENSE

Finally: gross profit + other income (the "no-name" figure) − total expenses = Profit for the year if positive, Loss for the year if negative (old name: net profit / net loss). Loss is very rare in exams.

3. The Adjustments Toolkit

Past-paper questions give a list of balances (trial balance) plus additional information (notes). Read the notes before you start and keep an open mind — the notes change the numbers in the list.

① Accruals & prepayments — APPM

• Accrued / owing / outstanding / due at year end → ADD to what was paid (works for both expenses and income).
• Prepaid / paid in advance → DEDUCT (it belongs to next year).
• Reason: the matching concept — charge the year with what was used / earned in it, whether or not cash moved.
• Accrued expense → other payables (current liability) in the SOFP · prepaid expense / accrued income → other receivables (current asset) · prepaid income → other payables.

Accrued example (Bik): rent receivable $3,000 owing → income earned = 15,000 received + 3,000 = 18,000, and the 3,000 is a current asset in the SOFP.

② Depreciation — straight line vs reducing balance

Method	How to calculate
Straight line (SL)	% given → cost × rate life given → cost ÷ life "10% on cost" = straight line residual / scrap value → deduct it first: (cost − scrap) × % (e.g. (10,000 − 1,000) × 10% = 900)
Reducing balance	rate applied on NBV, not cost: (cost − provision for depreciation) × rate "diminishing balance" = same thing

• "Appropriate amount" on a lease (rate not given) → stated life ⇒ straight line ⇒ cost ÷ years of lease (Suria: 100,000 ÷ 25 = 4,000; Bik: 90,000 ÷ 20 = 4,500).
• Charge depreciation on all non-current assets owned at the end of the year — a full-year policy; exams do not use month-by-month (tricky!).
• If an asset was bought but not yet recorded, or recorded in the wrong account (e.g. a computer put in maintenance), add it to cost first, then depreciate.
• Land never depreciates → a dash "–" in the accumulated-depreciation column.

③ Irrecoverable debts & provision for doubtful debts

• Irrecoverable (bad) debt = customer has failed to pay → always an expense (whether already written off, still to be written off, in the list or in the notes).
• Provision for doubtful debts = an estimate of future bad debts — recorded now under the prudence concept (anticipate losses).
• Irrecoverable debt is never shown on the face of the SOFP; the SOFP shows trade receivables less provision for doubtful debts.

④ Loans — interest and classification

• Even if no interest has been paid, the full interest is still an expense (matching concept).
• Partly paid: e.g. interest 4,800, 3,000 paid → 1,800 accrued → show workings "3,000 paid + 1,800 accrued" = 4,800.
• Part-year: "3 months' interest due" → 60,000 × 8% × 3/12 = 1,200 accrued (Boris).
• Students forget this accrual in the SOFP — it is usually not in the notes! Compute loan interest accrued and put it in other payables.

⑤ Disposal account, owner's items & errors

Situation	Treatment
Disposal account debit balance	LOSS on disposal → expense (loss is debit in nature)
Disposal account credit balance	GAIN on disposal → other income
Salary paid to the owner (in staff salaries)	not salary → drawings: Dr Drawings, Cr Salaries (deduct from salaries, add to drawings)
Goods taken by owner	drawings: Dr Drawings, Cr Purchases (goods drawn → in cost of sales)
Asset bought but recorded as an expense (computer $8,000 in maintenance)	capital item wrongly treated as revenue: Dr Computers, Cr Maintenance — deduct from expense, add to asset cost
Purchase omitted from books ($4,000: $1,000 cheque, $3,000 credit)	Dr Purchases 4,000 · Cr Bank 1,000 · Cr Trade payables 3,000
New asset paid by cheque, not recorded (fixtures $8,000)	Dr Fixtures 8,000 · Cr Bank 8,000

⑥ Reading the question — quick rules

• Inventory: in the list of balances = opening; in the notes = closing. Capital in the list is always opening (closing is never given).
• Start of year = day after the previous year end (y/e 31 Mar 2016 ⇒ started 1 Apr 2015).
• Bank: debit balance = positive (asset); credit balance = overdraft (current liability).
• Provision for depreciation in the list = depreciation up to last year; this year's is calculated in the income statement.
• Highlight every list item you use in the income statement so you can spot what is left for the SOFP.

4. Worked Question 1 — Suria (Income Statement)

Sorting the list — what each item is

• Revenue = sales; returns inwards → deduct. Inventory in the list = opening (15,340); closing is note 1 (17,990).
• Capital, drawings, leasehold, computers, furniture, provisions for depreciation, bank, trade payables/receivables → SOFP items (non-current assets: leasehold, computers, furniture).
• Commission receivable (ends in "receivable") → other income. Wages, computer maintenance, rent & rates, heat & light, advertising, general → expenses.
• 6% bank loan: repayable June 2016 — only 3 months after year end ⇒ current liability; interest paid 1,500 ⇒ the rest is accrued.

Workings (one per adjustment)

Suria — Income Statement for the year ended 31 March 2016	$	$
Sales	287,000
Less: Return inwards	(3,150)	283,850
Less: Cost of sales
Opening inventory	15,340
Add: Purchases	143,800
Less: Return outwards / Carriage inwards	–
Less: Closing inventory	(17,990)
Cost of sales		(141,150)
Gross profit		142,700
Add: Other income — Commission receivable [4,900 + 1,400]		6,300
(no-name figure)		149,000

(continued) Suria — expenses	$	$
Less: Expenses
Wages and salaries	26,500
Computer maintenance [12,200 − 8,000]	4,200
Rent and rates	10,000
Bank loan interest [1,500 + 900]	2,400
Heat and light	7,300
Advertising [12,600 − 3,800]	8,800
General expenses [8,700 + 2,400]	11,100
Depreciation: leasehold [100,000 ÷ 25]	4,000
Depreciation: computers [(44,000 + 8,000 − 16,600) × 25%]	8,850
Depreciation: office furniture [15,500 × 10%]	1,550
Irrecoverable debt	1,900
Increase in provision for doubtful debts [1,040 − 910]	130	(86,730)
Profit for the year		62,270

Answer: Profit for the year = $62,270  (gross profit 142,700 · total expenses 86,730)

5. Worked Question 2 — Boris (Income Statement)

Sorting the list

• Disposal account is a debit balance ⇒ loss on disposal 7,500 ⇒ expense (credit would mean gain ⇒ other income).
• Carriage is unspecified → note 3: 2,500 = carriage inwards (cost of sales); remainder = carriage outwards (expense).
• Loan 8% repayable July 2020: well over a year after 30 Apr 2018 ⇒ non-current (if due by April 2019 it would be current).
• Rent received → other income (no adjustment). Bank is a debit ⇒ asset. Drawings and capital → SOFP.

Workings

Boris — Income Statement for the year ended 30 April 2018	$	$
Sales	419,000
Less: Return inwards	(7,800)	411,200
Less: Cost of sales
Opening inventory	28,900
Add: Purchases [242,000 + 4,000]	246,000
Less: Return outwards	(6,200)
Add: Carriage inwards	2,500
Less: Drawing of goods	(4,500)
Less: Closing inventory	(22,500)
Cost of sales		(244,200)
Gross profit		167,000
Add: Other income — Rent receivable		9,000
(no-name figure)		176,000

(continued) Boris — expenses	$	$
Less: Expenses
Loss on disposal	7,500
Loan interest [2,400 + 1,200]	3,600
Administration expenses	30,000
Carriage outwards [11,500 − 2,500]	9,000
Water and electricity	12,400
Wages and salaries	51,600
Advertising [24,000 − 6,000]	18,000
General expenses	17,400
Depreciation: premises [100,000 × 2%]	2,000
Depreciation: computer equipment [(40,000 − 15,000) × 20%]	5,000
Depreciation: fixtures and fittings [10,000 × 10%]	1,000
Irrecoverable debt	2,400
Increase in provision for doubtful debts [1,400 − 900]	500	(160,400)
Profit for the year		15,600

Answer: Profit for the year = $15,600  (gross profit 167,000 · expenses 160,400)

6. Worked Question 3 — Bik (Income Statement)

Sorting the list

• Rent receivable → other income (note 3: 3,000 owing = accrued ⇒ add). Disposal a/c debit ⇒ loss 6,000 ⇒ expense.
• The question says "return inwards/outwards" — the examiner now prefers sales returns / purchase returns; same items.
• Loan repayable 31 Dec 2017 — within the next year (year to 28 Feb 2018) ⇒ current liability.
• Note 2: owner cannot draw a salary — the 8,000 is drawings (Dr Drawings, Cr Staff salaries).
• Note 6 is an unrecorded asset purchase: Dr Fixtures, Cr Bank → fixtures cost becomes 32,000 and bank falls 8,000. Note 7 → "owned at end of year" ⇒ full-year policy.

Workings

Bik — Income Statement for the year ended 28 February 2017	$	$
Sales	410,000
Less: Return inwards	(15,600)	394,400
Less: Cost of sales
Opening inventory	24,050
Add: Purchases	216,800
Less: Return outwards	(9,550)
Add: Carriage inwards	–
Less: Closing inventory	(20,700)
Cost of sales		(210,600)
Gross profit		183,800
Add: Other income — Rent receivable [15,000 + 3,000]	18,000	18,000
(no-name figure)		201,800

(continued) Bik — expenses	$	$
Less: Expenses
Irrecoverable debt	2,500
Increase in provision for doubtful debts [1,600 − 1,100]	500
Administration expenses	71,000
Insurance	6,800
Electricity	10,200
Staff salaries [59,700 − 8,000]	51,700
Advertising	27,500
General expenses [14,600 + 5,000]	19,600
Depreciation: leasehold buildings [90,000 ÷ 20]	4,500
Depreciation: shop fixtures [(24,000 + 8,000) × 15%]	4,800
Depreciation: computer equipment [(60,000 − 42,000) × 30%]	5,400
Loss on disposal	6,000
Loan interest [60,000 × 8%]	4,800	(215,300)
Loss for the year		(13,500)

Answer: LOSS for the year = $13,500  (expenses 215,300 exceed gross profit + other income 201,800)

7. Statement of Financial Position — Format

Three columns again not debit / credit — just presentation. Heading (if not given): owner's name → Statement of financial position → as at (date). The "Assets" heading is optional, as is "Capital and liabilities" (skipping them costs no mark).

ARD — Statement of financial position as at 31 Dec 2021	$	$	$
Non-current assets	Cost	Acc. dep.	NBV
Land & buildings	XX	(XX)	XX
Motor vehicles	XX	(XX)	XX
Fixtures & fittings	XX	(XX)	XX
			XX
Current assets (order of liquidity)
Inventory (closing)		XX
Trade receivables	XX
Less: provision for doubtful debts	(X)	XX
Other receivables (prepaid expense + accrued income)		XX
Bank		XX
Cash		XX	XX
Total assets			XX

(continued) Capital and liabilities	$	$	$
Capital (equity)
Opening capital		XX
Add: Profit for the year (or less: loss)		XX
Less: Drawings		(XX)	XX
Non-current liabilities
10% Bank loan 2023 (name = rate + year!)			XX
Current liabilities
Trade payables		XX
Other payables (accrued expenses + prepaid income)		XX
Bank overdraft		XX	XX
Total capital and liabilities			XX

① Non-current assets — the 3 columns

• Cost = original price paid · Accumulated depreciation (= provision for depreciation) = total depreciation to date · NBV (net book value) = what is left in the books.
• Accumulated depreciation at year end = provision in the list (to last year) + this year's depreciation from the income statement.
• Bought a new asset or an unrecorded one? Add it to the cost.
• List the assets in order of life: land (indefinite), buildings, motor vehicles, equipment… the examiner already lists them in order — copy that sequence.
• Do not total the cost or accumulated-depreciation columns — only the NBV column is totalled.

② Current assets — order of liquidity

• Inventory = closing inventory (SOFP is at year end) — in the 2nd column. Longest time to turn into cash.
• Trade receivables (credit customers) go in the 1st column, because we deduct the provision for doubtful debts underneath; the net figure moves to column 2.
• Other receivables = prepaid expenses + accrued income (paid in advance / earned but not yet received).
• Bank (debit balance) then cash. Sometimes combined as "cash and bank" / cash & cash equivalents.
• Current assets = used / turned into cash within a year, "temporary", bought for resale; non-current = more than a year, "permanent", bought for use.

③ Capital & liabilities

• Capital given in the question is always opening; closing is never given. Do not label the result "closing capital" — it is understood.
• Profit increases capital → add. Loss decreases it → deduct. Profit/loss comes from your income statement (if only the SOFP is asked, the examiner gives it).
• Drawings = anything the owner takes for personal use — cash, cheque, goods, non-current assets — always deducted. Include drawings hidden in notes (salary to owner, goods taken).
• Non-current liabilities first (loans repayable after more than a year), then current liabilities. Loan name = rate + year (e.g. 10% Bank loan 2020) — compulsory. One loan → write it in the 3rd column; several → column 2 then total in column 3.
• Current liabilities: trade payables (credit suppliers), bank overdraft (borrowed more than we have — repayable on demand), other payables = accrued expenses (used but not yet paid, e.g. unpaid telephone/electricity, loan interest owing) + prepaid income (received in advance — rare).
• Total capital + liabilities must equal total assets ⇒ the SOFP is balanced.

8. Worked Question 4 — Suria (SOFP)

Workings

Suria — Statement of financial position as at 31 March 2016	$	$	$
Non-current assets	Cost	Acc. dep.	NBV
Leasehold premises	100,000	(11,000)	89,000
Computers [44,000 + 8,000]	52,000	(25,450)	26,550
Office furniture	15,500	(13,550)	1,950
			117,500
Current assets
Inventory		17,990
Trade receivables [27,900 − 1,900]	26,000
Less: provision for doubtful debts	(1,040)	24,960
Other receivables [1,400 + 3,800]		5,200
Cash and bank		520	48,670
Total assets			166,170

(continued) Suria — capital and liabilities	$	$	$
Capital
Opening capital		70,000
Add: Profit for the year		62,270
Less: Drawings		(28,000)	104,270
Current liabilities
Trade payables		18,600
6% Bank loan 2016		40,000
Other payables [2,400 + 900]		3,300	61,900
Total capital and liabilities			166,170

Answer: Total assets = Total capital & liabilities = $166,170 ✓ balanced

9. Worked Question 5 — Bik (SOFP)

Workings

Bik — Statement of financial position as at 28 February 2017	$	$	$
Non-current assets	Cost	Acc. dep.	NBV
Leasehold buildings	90,000	(18,000)	72,000
Shop fixtures [24,000 + 8,000]	32,000	(18,800)	13,200
Computer equipment	60,000	(47,400)	12,600
			97,800
Current assets
Inventory		20,700
Trade receivables [34,500 − 2,500]	32,000
Less: provision for doubtful debts	(1,600)	30,400
Other receivables — rent receivable		3,000
Bank [20,500 − 8,000]		12,500	66,600
Total assets			164,400

(continued) Bik — capital and liabilities	$	$	$
Capital
Opening capital		100,000
Less: Loss for the year		(13,500)
Less: Drawings [9,500 + 8,000]		(17,500)	69,000
Current liabilities
Trade payables		25,600
Other payables [5,000 + 4,800]		9,800
8% Bank loan 2017		60,000	95,400
Total capital and liabilities			164,400

Answer: Total assets = Total capital & liabilities = $164,400 ✓ balanced

10. Worked Question 6 — Boris (SOFP)

Workings

Boris — Statement of financial position as at 30 April 2018	$	$	$
Non-current assets	Cost	Acc. dep.	NBV
Premises	100,000	(66,000)	34,000
Computer equipment	40,000	(20,000)	20,000
Fixtures and fittings	10,000	(5,500)	4,500
			58,500
Current assets
Inventory		22,500
Trade receivables [37,400 − 2,400]	35,000
Less: provision for doubtful debts	(1,400)	33,600
Other receivables — advertising prepaid [9,000 × 4/6]		6,000
Bank [4,000 − 1,000]		3,000	65,100
Total assets			123,600

(continued) Boris — capital and liabilities	$	$	$
Capital
Opening capital		50,000
Add: Profit for the year		15,600
Less: Drawings [20,700 + 4,500]		(25,200)	40,400
Non-current liabilities
8% Bank loan 2020			60,000
Current liabilities
Trade payables [19,000 + 3,000]		22,000
Other payables — loan interest [60,000 × 8% × 3/12]		1,200	23,200
Total capital and liabilities			123,600

Answer: Total assets = Total capital & liabilities = $123,600 ✓ balanced

11. Typed Formats — ARD Traders, 2017

The typed pages of the board file show the same formats with a few extra lines (gain on disposal, repairs, bad debt expense, prepaid/accrued income). Memorise these too.

ARD Traders — Income Statement for the year ended 31 Dec 2017	$	$
Sales	XXX
Less: Return inward / sales returns	(XXX)	XXX
Less: COST OF SALES
Opening inventory	XXX
Add: Purchases	XXX
Add: Carriage inwards	XX
Add: Customs duty	XX
Less: Return outward / purchases return	(XX)
Less: Closing inventory	(XXX)
Cost of sales		(XXX)
Gross profit		XXX
Add: OTHER INCOME
Discount received	XXX
Commission received	XXX
Reduction in provision for doubtful debts	XXX
Gain on disposal of NCA	XXX	XXX

(continued) expenses	$	$
Less: EXPENSES
Salaries and wages	XXX
Rent expenses	XXX
Insurance expense	XXX
Heating and lighting	XXX
Sundry expenses	XXX
Depreciation expense	XXX
Increase in provision for doubtful debts	XXX
Discount allowed	XXX
Carriage outward / carriage on sales	XXX
Bad debt expense	XXX
Financial cost (interest expense)	XXX
Repair and maintenance	XXX	(XXX)
Profit / (Loss) for the year		XX/(XX)

ARD Traders — SOFP as at 31 December 2017	$	$	$
Non-current assets	Cost	Accum. dep.	NBV
Land	XXX	–	XX
Building	XXX	(XX)	XX
Equipment	XXX	(XX)	XX
			XXX
Current assets
Inventory		XXX
Trade receivables / debtors	XXX
Less: provision for doubtful debts	(XXX)	XXX
Other receivables: Expense (prepaid)		XXX
Income (accrued)		XXX
Bank		XXX
Cash		XXX	XXX
Total assets			XXX

(continued) Capital and liabilities	$	$	$
Opening capital		XXX
Add: Profit for the year / Less: (Loss) for the year		XX(XX)
Less: Drawings		(XXX)	XXX
Non-current liabilities — 10% Bank loan 2020			XXX
Current liabilities: Trade payables / creditors		XXX
Bank O/D (overdraft)		XXX
Other payables: Expense (accrued)		XXX
Income (prepaid)		XXX	XXX
Total capital and liabilities			XXX

12. Quick Recap — Full Chapter Cheat-Sheet