How do you prepare an income statement and a statement of financial position for a sole trader, including the year-end adjustments?
Preparation of the income statement (trading and profit and loss) and statement of financial position for a sole trader, including adjustments for closing inventory, accruals, prepayments, depreciation, irrecoverable debts and provision for doubtful debts.
A focused answer to the SQA Higher Accounting sole trader final accounts content, covering the income statement and statement of financial position with year-end adjustments for inventory, accruals, prepayments, depreciation, irrecoverable debts and a provision for doubtful debts.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
The SQA wants you to prepare a full set of final statements for a sole trader: an income statement that finds gross profit and then profit for the year, and a statement of financial position that lists assets, liabilities and capital. The challenge at Higher is applying the year-end adjustments correctly, because each one changes a figure in both statements.
The income statement
The income statement is in two parts. The trading part finds gross profit; the profit and loss part finds profit for the year.
Purchases may need adjusting for carriage inwards (added to purchases) and for goods the owner took for personal use (deducted from purchases, as drawings). Returns inwards reduce sales and returns outwards reduce purchases.
The statement of financial position
This statement shows the position at one moment: what the business owns, what it owes, and the owner's stake. It always balances because every asset is financed either by a liability or by capital.
Non-current assets are shown at cost less accumulated depreciation, giving the carrying (net book) value. Current assets are inventory, trade receivables (net of the provision for doubtful debts), prepayments and cash. Current liabilities are trade payables, accruals and short-term borrowing.
The five adjustments
Order of working
A reliable routine is: deal with closing inventory in cost of sales; adjust each expense for accruals and prepayments; calculate and charge depreciation; write off irrecoverable debts then calculate the provision on the reduced receivables; total the expenses; find profit; then build the statement of financial position, carrying the same adjusted figures across so the two statements agree.
Try this
Q1. Opening inventory is £9,000, purchases £61,000, closing inventory £11,000. Calculate cost of sales. [2 marks]
- Cue. £9,000 + £61,000 - £11,000 = £59,000.
Q2. Rent of £12,000 was paid but £1,000 relates to next year. State the expense charged and where the £1,000 appears. [2 marks]
- Cue. Charge £11,000 as the expense; the £1,000 prepayment is a current asset in the statement of financial position.
Q3. Capital was £80,000, profit £25,000 and drawings £18,000. Calculate closing capital. [2 marks]
- Cue. £80,000 + £25,000 - £18,000 = £87,000.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style6 marksA sole trader has sales of £180,000, opening inventory £14,000, purchases £96,000 and closing inventory £18,000. Expenses for the year are £40,000, but £2,000 of rent is still owing and £1,500 of insurance has been prepaid. Calculate gross profit and profit for the year.Show worked answer →
Cost of sales = opening inventory + purchases - closing inventory = £14,000 + £96,000 - £18,000 = £92,000 (1 mark).
Gross profit = sales - cost of sales = £180,000 - £92,000 = £88,000 (1 mark).
Adjust expenses: add the accrued rent and subtract the prepaid insurance: £40,000 + £2,000 - £1,500 = £40,500 (2 marks for both adjustments correct).
Profit for the year = gross profit - adjusted expenses = £88,000 - £40,500 = £47,500 (2 marks). Markers reward the cost of sales, the gross profit, both adjustments and the final profit.
SQA Higher style4 marksTrade receivables are £50,000 before adjustment. An irrecoverable debt of £2,000 is to be written off and a provision for doubtful debts of 4% is to be created on the remaining receivables. Calculate the total charge to the income statement and the net trade receivables figure for the statement of financial position.Show worked answer →
Write off the irrecoverable debt: remaining receivables = £50,000 - £2,000 = £48,000 (1 mark).
Provision for doubtful debts = 4% of £48,000 = £1,920 (1 mark).
Total charge to the income statement = irrecoverable debt + new provision = £2,000 + £1,920 = £3,920 (1 mark).
Net trade receivables in the statement of financial position = £48,000 - £1,920 = £46,080 (1 mark). Markers reward the write-off, the provision on the correct base, the combined charge and the net figure.
Related dot points
- The fundamental accounting concepts and conventions (going concern, accruals, consistency, prudence, materiality, business entity, money measurement, historical cost and matching) and their effect on the preparation of financial accounting information.
A focused answer to the SQA Higher Accounting concepts and conventions content, covering going concern, accruals, consistency, prudence, materiality, business entity, money measurement, historical cost and matching, and how each one shapes the figures in the financial statements.
- Calculation and recording of depreciation using the straight-line and reducing-balance methods, the reasons for depreciating non-current assets, and the accounting treatment for the disposal of a non-current asset including any profit or loss on disposal.
A focused answer to the SQA Higher Accounting depreciation content, covering the straight-line and reducing-balance methods, why assets are depreciated, the accumulated depreciation and carrying value, and the accounting for the disposal of a non-current asset with any profit or loss.
- Preparation of the partnership appropriation account and partners' capital and current accounts, including interest on capital, interest on drawings, partners' salaries and the division of residual profit in the agreed profit-sharing ratio.
A focused answer to the SQA Higher Accounting partnership content, covering the appropriation account, interest on capital and drawings, partners' salaries, sharing residual profit in the agreed ratio, and the difference between fixed capital accounts and fluctuating current accounts.
- Preparation of the income statement and statement of financial position for a limited company, including ordinary and preference share capital, share premium, the general reserve, retained earnings, dividends, debentures and the appropriation of profit.
A focused answer to the SQA Higher Accounting limited company content, covering ordinary and preference share capital, share premium, reserves, retained earnings, dividends, debentures, and how a company appropriates profit and presents its equity.
- Calculation and interpretation of accounting ratios covering profitability (gross profit percentage, profit for the year percentage, return on capital employed), liquidity (current ratio, acid test ratio) and efficiency (rate of inventory turnover, trade receivable and trade payable days).
A focused answer to the SQA Higher Accounting ratios content, covering the profitability ratios (gross profit percentage, profit percentage, return on capital employed), the liquidity ratios (current and acid test) and the efficiency ratios (inventory turnover, receivable and payable days), with how each is interpreted.
Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)