IGCSE Accounting — Sole Traders' Financial Statements: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 5: Preparation of Financial Statements

Sole Traders’ Financial Statements

Two statements tell the whole story of a sole trader’s year: the statement of profit or loss (how much was earned) and the statement of financial position (what the business owns and owes at year end).

1. Statement of Profit or Loss

Revenue − Cost of sales = Gross profit

Gross profit + Other income − Expenses = Profit for the year

Cost of sales = Opening inventory + Purchases − Closing inventory

Worked example — cost of sales and gross profit Opening inventory $2,000, purchases $15,000, closing inventory $3,000, revenue $25,000. Calculate cost of sales and gross profit.
Cost of sales = 2,000 + 15,000 − 3,000 = $14,000.
Gross profit = 25,000 − 14,000 = $11,000

2. Statement of Financial Position

Non-current assets + Current assets − Current liabilities − Non-current liabilities = Capital

Closing capital = Opening capital + Profit for the year − Drawings

Drawings include cash taken by the owner, goods or other assets taken for personal use (valued at cost), and private expenses paid using business money — all reduce capital.

Worked example — closing capital Opening capital $20,000, profit for the year $8,000, drawings $5,000. Calculate closing capital.
20,000 + 8,000 − 5,000 = $23,000

Common mistakes to watch for

Forgetting that goods taken by the owner for personal use must be removed from purchases (reducing cost of sales) as well as added to drawings.
Mixing up non-current and current assets/liabilities when preparing the statement of financial position layout.
Forgetting private expenses paid by the business (e.g. the owner’s personal insurance paid from the business bank account) count as drawings, not as a business expense.

Key Vocabulary Recap

Drawings — cash, goods, or value taken out of the business by the owner for personal use

Cost of sales — the cost of the goods actually sold during the period

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 5.1, Sole Traders: the statement of profit or loss, the statement of financial position, non-current/current assets and liabilities, capital, depreciation adjustments, accruals and prepayments, irrecoverable debts, and drawings.

Practice questions

IGCSE Accounting 0452 · Section 5.1: Sole Traders — Practice Question Bank (no answers)

Sole Traders’ Financial Statements — Practice

Covers: statement of profit or loss, statement of financial position, and drawings. 10 questions.

State the formula for calculating cost of sales.

Opening inventory $2,000, purchases $15,000, closing inventory $3,000, revenue $25,000. Calculate cost of sales and gross profit.

Gross profit is $11,000, other income is $500, and total expenses are $6,200. Calculate profit for the year.

State the formula linking opening capital, profit for the year, drawings, and closing capital.

Opening capital $20,000, profit for the year $8,000, drawings $5,000. Calculate closing capital.

Explain how goods taken by the owner for personal use should be treated in the accounts.

Explain how a private expense (e.g. the owner’s personal phone bill) paid using business funds should be treated in the accounts.

Explain the difference between a non-current asset and a current asset, giving one example of each.

Explain the difference between a non-current liability and a current liability, giving one example of each.

Q10

State two advantages of operating as a sole trader.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 5.1: Sole Traders — Solutions

Sole Traders’ Financial Statements — Practice: Solutions

Formula for cost of sales.

✓Cost of sales = Opening inventory + Purchases − Closing inventory

Opening inv $2,000, purchases $15,000, closing inv $3,000, revenue $25,000.

Cost of sales

2,000+15,000−3,000=14,000

Gross profit = Revenue − Cost of sales

25,000−14,000

✓Cost of sales = $14,000; Gross profit = $11,000

GP $11,000, other income $500, expenses $6,200.

Profit = GP + other income − expenses

11,000+500−6,200

✓$5,300

Formula linking opening/closing capital.

✓Closing capital = Opening capital + Profit for the year − Drawings

Opening $20,000, profit $8,000, drawings $5,000.

Closing capital = Opening + Profit − Drawings

20,000+8,000−5,000

✓$23,000

Goods taken for personal use.

✓Goods taken by the owner (valued at cost) are removed from purchases (reducing cost of sales) and added to drawings (reducing capital) — they must not be included in the cost of goods sold to customers.

Private expense paid by the business.

✓A private expense paid using business funds is treated as drawings, not a business expense — it is removed from the relevant expense account and added to drawings, since it does not relate to running the business.

Non-current vs current asset, with examples.

✓A non-current asset is held for long-term use in the business (e.g. machinery, buildings), not intended for resale. A current asset is expected to be converted to cash or used up within one year (e.g. inventory, trade receivables, cash).

Non-current vs current liability, with examples.

✓A non-current liability is due for repayment after more than one year (e.g. a long-term bank loan). A current liability is due for repayment within one year (e.g. trade payables, a bank overdraft).

Q10

Two advantages of a sole trader.

✓Any two of: quick and easy to set up; the owner keeps all the profit; the owner has full control over decisions; financial affairs remain private (no requirement to publish accounts).

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