Recap: Sole trader accounts

A sole trader is one person who owns a business. Priya Marlow owns Marlow Cycles, a bike shop.

The statement of profit or loss sets the income of a period against the expenses of the same period. The period is usually a year, so the heading reads: for the year ended 31 March.

Income

what the business earns, mostly from sales

Expense

a cost of running the business in the period

Profit for the year

income is more than expenses

Loss for the year

expenses are more than income

Assets, liabilities, capital and drawings are not income or expenses. They stay out of this statement.

The statement is built in steps, and always in the same order.

• Revenue: sales less sales returns
• Less cost of sales: what the goods sold cost the business
• Gross profit: revenue less cost of sales
• Less expenses: the other costs of running the business
• Profit or loss for the year: gross profit less expenses

If the expenses come to more than the gross profit, the last line is a loss for the year.

Drawings are not an expense. They never appear in the statement of profit or loss.

Cash taken by the owner is a debit to Drawings and a credit to Bank.

Goods taken for the owner's own use are a debit to Drawings and a credit to Purchases, at cost. The goods were never sold, so they come out of purchases.

Net assets are all the assets less all the liabilities. Start with non-current assets, add net current assets, then take away non-current liabilities.

For Marlow Cycles the carrying amount of the shop fittings is £8,000, net current assets are £11,000 and the bank loan is £4,000.

Net assets always equal the owner's capital. That is the accounting equation: assets less liabilities equals capital.

A sole trader is one person who owns a business. Priya Marlow owns Marlow Cycles, a bike shop.

The statement of profit or loss sets the income of a period against the expenses of the same period. The period is usually a year, so the heading reads: for the year ended 31 March.

Income

what the business earns, mostly from sales

Expense

a cost of running the business in the period

Profit for the year

income is more than expenses

Loss for the year

expenses are more than income

Assets, liabilities, capital and drawings are not income or expenses. They stay out of this statement.

The statement is built in steps, and always in the same order.

• Revenue: sales less sales returns
• Less cost of sales: what the goods sold cost the business
• Gross profit: revenue less cost of sales
• Less expenses: the other costs of running the business
• Profit or loss for the year: gross profit less expenses

If the expenses come to more than the gross profit, the last line is a loss for the year.