Chapter 17: preparation of sole traders’ accounts Learning outcomes: Prepare the final accounts of a sole trader TITLE HERE 00 MONTH 0000

Preparation of final accounts Adjustment to accounts Question The financial affairs of Newbegin Tools prior to the commencement of trading were as follows. NEWBEGIN TOOLS STATEMENT OF FINANCIAL POSITION AS AT 1 AUGUST 20X5 Non-current assets Motor vehicle $2,000 Shop fittings 3,000 5,000 Current assets 12,000 Inventories 1,000 Cash 18,000 Capital Current liabilities Bank overdraft $2,000 Trade payables 4,000 6,000 18,000 TITLE HERE 00 MONTH 0000

Preparation of final accounts Adjustment to accounts Question At the end of six months the business had made the following transactions. Goods were purchased on credit at a list price of $10,000. Trade discount received was 2% on list price and there was a settlement discount received of 5% on setting debts to supplier of $8,000. These were the only payments to suppliers in the period. Closing inventories of goods were valued at $5,450. All sales were on credit and amounted to $27,250. Outstanding receivables balances at 31 January 20X6 amounted to $3,250 of which $250 were to be written off. An allowance for receivables is to be made amounting to 2% of the remaining outstanding receivables. Cash payments were made in respect of the following expenses. Cash drawings by the proprietor, Alf Newbegin, amounted to $6,000. Stationery, postage and wrapping $500 Telephone charges 200 Electricity 600 Cleaning and refreshments 150 (h) The outstanding overdraft balance as at 1 August 20X5 was paid off. Interest charges and bank charges on the overdraft amounted to $40. Prepare the income statement of Newbegin Tools for the six months to 31 January 20X6 and a statement of financial position as at that date. Ignore depreciation TITLE HERE 00 MONTH 0000

Preparation of final accounts Adjustment to accounts Answer INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 JANUARY 20X6 Sales $27,250 Opening inventories $12,000 Purchase 9,800 21,800 Less closing inventories 5,450 Cost of goods sold 16,350 Gross profit 10,900 Discounts received 400 11,300 Electricity 600 Stationery, postage and wrapping 500 Bad debt written off 250 Allowance for receivables 60 Telephone charges 200 Cleaning and refreshment 150 Interest and bank charges 40 1,800 Net profit 9,500 TITLE HERE 00 MONTH 0000

Example: accounts preparation from a trial balance The following trial balance was extracted from the ledger of Stephen Chee, a sole trader, as at 31 May 20X1-the end of his financial year. STEPHEN CHEE TRIAL BALANCE AS AT 31 MAY 20X1 Dr Cr Property, at cost 120,000 Equipment , at cost 80,000 Provisions for depreciation(as at 1 June 20X0) ----on property 20,000 ----on equipment 38,000 Purchases 250,000 Sales 402,000 Stock, as at 1 June 20X0 50,000 Discounts allowed 18,000 Discounts received 4,800 Returns out 15,000 Wages and salaries 58,800 Bad debt 4,600 Loan interest 5,100 Other operating expense 17,700 Trade payables 36,000 Trade receivables 38,000 Cash in hand 300 Bank 1,300 Drawings 24,000 Allowance for receivables 500 17% long term loan 30,000 Capital, as at 1 June 20X0 121,300 667,800 667,800 TITLE HERE 00 MONTH 0000

Example: accounts preparation from a trial balance The following additional information as at 31 May 20X1 is available. Inventory as at the close of business has been valued at cost at $42,000. Wages and salaries need to be accrued by $800. Other operating expenses are prepaid by $300. The allowance for receivables is to be adjusted so that it is 2% of trade receivables. Depreciation for the year ended 31 May 20X1 has still to be provided for as follows. Property: 1.5% per annum using the straight line method; and Equipment: 25% per annum using the reducing balance method. Required Prepare Stephen Chee’s income statement for the year ended 31 May 20X1 and his statement of financial position as at that date. TITLE HERE 00 MONTH 0000

Example: accounts preparation from a trial balance Solution STEPHEN CHEE INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 20X1 Sales $402,200 Cost of sales Opening inventories $50,000 Purchase 250,000 Purchase returns (15,000) 285,000 Closing inventories 42,000 243,000 Gross profit 159,200 Other income-discounts received 4,800 164,000 Expenses Operating expenses Wages and salaries 59,600 Discounts allowed 18,000 Bad debt 4,860 Loan interest 5,100 Depreciation 12,300 Other operating expenses 17,400 117,260 Net profit for the year 46,740 TITLE HERE 00 MONTH 0000

Example: accounts preparation from a trial balance Solution STEPHEN CHEE STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X0 Cost Accumulated depn. Net book value Non-current assets Property $120,000 $21,800 $98,200 Equipment 80,000 48,500 31,500 200,000 70,300 129,700 Current assets Stock 42,000 Trade receivables net of allowance for receivables 37,240 Prepayments 300 Bank 1,300 Cash in hand 300 81,140 210,840 TITLE HERE 00 MONTH 0000

Example: accounts preparation from a trial balance Solution STEPHEN CHEE STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X0 Capital Balance at 1 June 20X0 $121,300 Net profit for the year 46,740 168,040 Drawings 24,000 144,040 Non-current liabilities 17% loan 30,000 Current liabilities Trade payables $36,000 Accruals 800 36,800 210,840 TITLE HERE 00 MONTH 0000