A sole trader’s year ends with three statements. The trading account shows gross profit, the profit and loss statement shows net profit, and the statement of financial position shows what the business owns and owes at a date.
This topic comes after the trial balance and before adjustments.
Which item goes into which statement?
Use this short map as a first check.
| Item | Statement |
|---|---|
| Sales, purchases, opening and closing stock | Trading account |
| Rent, wages, electricity, discount received | Profit and loss statement |
| Equipment, stock, debtors, bank | Statement of financial position (assets) |
| Creditors, loans | Statement of financial position (liabilities) |
| Capital and drawings | Statement of financial position (capital) |
Profit, the result of the first two statements, is added to capital in the third.
An example to orient you
An original one-year shop: sales 48 000, opening stock 6 000, purchases 30 000, closing stock 8 000. Cost of sales is 6 000 + 30 000 − 8 000 = 28 000, so gross profit is 20 000.
If rent, wages and electricity total 13 500 and discount received is 400, net profit is 20 000 + 400 − 13 500 = 6 900. That single figure then moves into the capital section of the statement of financial position.
Who should start where?
- Not sure what gross profit means: read distinguishing gross and net profit.
- Building the first statement: read preparing a trading account.
- Building the second: read preparing a profit and loss statement.
- Building the third: read preparing a statement of financial position.
Test all three on the sole trader practice set. For a teacher who checks your layout line by line, see online one-to-one Accounting tuition.