1. Chapter 17: preparation of sole traders’ accounts
Learning outcomes:
Prepare the final accounts of a sole trader
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2. 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 ,000
5,000
Current assets ,000
Inventories ,000
Cash ,000
Capital
Current liabilities
Bank overdraft $2,000
Trade payables ,000
6,000
18,000
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3. 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
Electricity
Cleaning and refreshments
(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
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4. 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 ,800
21,800
Less closing inventories ,450
Cost of goods sold ,350
Gross profit ,900
Discounts received
11,300
Electricity
Stationery, postage and wrapping
Bad debt written off
Allowance for receivables
Telephone charges
Cleaning and refreshment
Interest and bank charges
1,800
Net profit ,500
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5. 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 20X Dr Cr
Property, at cost ,000
Equipment , at cost ,000
Provisions for depreciation(as at 1 June 20X0)
----on property ,000
----on equipment ,000
Purchases ,000
Sales ,000
Stock, as at 1 June 20X ,000
Discounts allowed ,000
Discounts received ,800
Returns out ,000
Wages and salaries ,800
Bad debt ,600
Loan interest ,100
Other operating expense ,700
Trade payables ,000
Trade receivables ,000
Cash in hand
Bank ,300
Drawings ,000
Allowance for receivables
17% long term loan ,000
Capital, as at 1 June 20X ,300
667, ,800
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6. 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.
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7. 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 ,000
Purchase returns (15,000)
285,000
Closing inventories ,000
243,000
Gross profit ,200
Other income-discounts received ,800
164,000
Expenses
Operating expenses
Wages and salaries ,600
Discounts allowed ,000
Bad debt ,860
Loan interest ,100
Depreciation ,300
Other operating expenses ,400
117,260
Net profit for the year ,740
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8. 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, $21, $98,200
Equipment , , ,500
200, , ,700
Current assets
Stock ,000
Trade receivables net of allowance for receivables 37,240
Prepayments
Bank ,300
Cash in hand
81,140
210,840
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9. Example: accounts preparation from a trial balance
Solution
STEPHEN CHEE
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X0
Capital
Balance at 1 June 20X $121,300
Net profit for the year ,740
168,040
Drawings ,000
144,040
Non-current liabilities
17% loan ,000
Current liabilities
Trade payables $36,000
Accruals
36,800
210,840
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