Preparation of financial statements of sole traders flashcards

Topic 6: Preparation of financial statements of sole traders

Insurance of £3,600 paid on 1 October 2025 for 12 months. Year end 31 March 2026. Prepayment?

6 of the 12 months are for next year: 3,600 × 6/12 = £1,800, a current asset.

Wages paid £48,300; opening accrual £900; closing accrual £1,150. Wages charge?

48,300 − 900 + 1,150 = £48,550.

Equipment £12,500 depreciated at 30% reducing balance. Year 2 charge?

Year 1: £3,750. Year 2: (12,500 − 3,750) × 30% = £2,625.

Provision for doubtful debts was £1,200. Receivables are now £32,000; provision 3%. Entries?

New provision £960: a decrease of £240, shown as income. Receivables shown as 32,000 − 960 = £31,040.

The owner takes goods costing £450 (selling price £600). Entry?

Debit drawings £450, credit purchases £450: at cost, not selling price.

Commission received £4,100, including £350 for next year; £200 earned this year is still owed. Income for the year?

4,100 − 350 + 200 = £3,950.

Rent received £7,200. At the start the tenant owed £600; at the end £400 had been received in advance. Rent receivable?

7,200 − 600 − 400 = £6,200. The £400 is a current liability.

Goods at selling price £900 (mark-up 50% on cost) sent on sale or return were recorded as a sale. Profit overstated by?

Cost £600. Revenue falls £900 and closing inventory rises £600, so profit is overstated by £300.

A debt written off two years ago is paid in full. Where does it appear this year?

As income (irrecoverable debts recovered) in this year's income statement, with the cash in bank. The earlier year is not changed.

Irrecoverable debt vs provision for doubtful debts

An irrecoverable debt is certain and removed from the customer's account. A provision is an estimate; the customer still owes the money. Only the change in the provision goes to the income statement.

Service business vs trading business income statement

A trading business has inventory, cost of sales and gross profit. A service business starts with fees or other income, then expenses; it has no cost of sales or gross profit.

A vehicle costing £15,000 with accumulated depreciation £9,600 is sold for £6,100. Result?

Carrying amount £5,400. Profit on disposal £700.