A sole trader is an individual who owns and runs a business on his or her own. The Cambridge IGCSE Accounting syllabus expects you to know the main advantages and disadvantages, and to be able to explain why a sole trader prepares financial statements.
| Advantages | Disadvantages |
|---|---|
| Full control over all decisions | Unlimited liability – personal assets are at risk for business debts |
| All profits belong to the owner | Limited source of capital – depends on personal savings or borrowing |
| Simple to set up and operate | Business usually ends on the owner’s death or retirement |
| Taxed as personal income (simpler tax return) | Harder to attract large investors or obtain large loans |
Cambridge wording: “the importance of preparing income statements and statements of financial position”. The key points are:
Both types of sole‑trader businesses use the same statement formats, but the income statement differs slightly.
The income statement reports the results of trading for a defined period (normally one year). The Cambridge syllabus requires the items to appear in the order shown below.
| Particulars | Amount (£) |
|---|---|
| Sales revenue | 45 000 |
| Cost of goods sold (trading business only) | 20 000 |
| Gross profit | 25 000 |
| Operating expenses (wages, rent, utilities, etc.) | 12 000 |
| Net profit (or net loss) | 13 000 |
Fundamental calculation
$$\text{Net profit} = \text{Revenue} - \text{COGS} - \text{Operating expenses}$$
The balance sheet gives a “snapshot” of the business at a specific date. The Cambridge syllabus expects a six‑category layout:
| Assets | Liabilities & Owner’s Capital | ||
|---|---|---|---|
| Non‑current assets | £15 000 | Non‑current liabilities | £7 000 |
| Intangible assets (e.g., patents) | £2 000 | ||
| Current assets | Current liabilities | ||
| Cash and bank | £8 000 | Trade payables | £5 000 |
| Stock | £12 000 | Accrued expenses | £1 000 |
| Pre‑payments | £1 000 | ||
| Total assets | £38 000 | Total liabilities & owner’s capital | £38 000 |
Before the statements are finalised, the following adjustments are normally required.
| Adjustment | Journal entry (Dr / Cr) |
|---|---|
| Depreciation of equipment (e.g., £2 000) | Depreciation expense Dr 2 000 / Accumulated depreciation Cr 2 000 |
| Accrued wages (earned but not yet paid) | Wages expense Dr … / Wages payable Cr … |
| Pre‑paid rent (rent paid in advance) | Pre‑payments Dr … / Rent expense Cr … |
| Irrecoverable debt (bad debt written off) | Bad‑debt expense Dr … / Trade receivables Cr … |
| Provision for doubtful debts (estimate of future bad debts) | Bad‑debt expense Dr … / Provision for doubtful debts Cr … |
| Goods taken by owner for personal use | Owner’s drawings Dr … / Stock Cr … |
The closing balance of Owner’s Capital is calculated as:
$$\text{Owner’s Capital}_{\text{closing}} = \text{Owner’s Capital}_{\text{opening}} + \text{Net profit} - \text{Drawings}$$
Example (using the figures above):
Closing capital = £20 000 + £13 000 – £5 000 = £28 000. This amount appears in the “Owner’s Capital” line of the statement of financial position.
Even if a sole trader does not keep a full set of detailed records, the required format must still be used. Figures can be derived from:
Exam questions often give only partial data; the key is to apply the correct categories, the accounting equation (Assets = Liabilities + Owner’s Capital) and the order of items required by the syllabus.
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