IGCSE Accounting 0452 - 5.1 Sole Traders

This section focuses on preparing statements of financial position (also known as balance sheets) for trading and service businesses operated by sole traders.

Understanding the Statement of Financial Position

The Statement of Financial Position shows a snapshot of a business's assets, liabilities, and equity at a specific point in time. It follows the fundamental accounting equation:

$$Assets = Liabilities + Equity$$

Where:

• Assets: What the business owns (e.g., cash, inventory, equipment).
• Liabilities: What the business owes to others (e.g., loans, accounts payable).
• Equity: The owner's stake in the business (e.g., capital, retained earnings).

Key Components of a Statement of Financial Position

Assets

Assets are typically listed in order of liquidity (how quickly they can be converted to cash):

• Current Assets: Assets expected to be converted to cash within one year. Examples include:
• Cash and Bank Balances
• Accounts Receivable (money owed to the business by customers)
• Inventory (stock of goods for sale)
• Prepaid Expenses (e.g., rent paid in advance)
• Fixed Assets: Long-term assets used in the business. Examples include:
• Property, Plant, and Equipment (PPE) - e.g., buildings, machinery, vehicles
• Accumulated Depreciation (the decrease in value of fixed assets over time)

Liabilities

Liabilities are also typically listed in order of when they are due:

• Current Liabilities: Liabilities due within one year. Examples include:
• Accounts Payable (money owed to suppliers)
• Loans Payable (short-term loans)
• Tax Payable
• Salaries Payable
• Non-Current Liabilities: Liabilities due in more than one year. Examples include:
• Long-term Loans

Equity

Equity represents the owner's investment in the business and any accumulated profits or losses.

• Capital: The initial investment made by the owner.
• Retained Earnings: Accumulated profits of the business that have not been distributed to the owner.

Preparing a Statement of Financial Position - Trading Business Example

Consider a sole trader business with the following information as of December 31, 2023:

• Cash: $10,000
• Accounts Receivable: $5,000
• Inventory: $8,000
• Equipment: $20,000
• Accumulated Depreciation: $5,000
• Accounts Payable: $3,000
• Loan Payable: $7,000
• Capital: $12,000
• Retained Earnings: $5,000

The Statement of Financial Position for "John's Repairs" would be:

Assets	Amount ($)
Current Assets
Cash	$10,000
Accounts Receivable	$5,000
Inventory	$8,000
Total Current Assets	$23,000
Fixed Assets
Equipment	$20,000
Less: Accumulated Depreciation	($5,000)
Net Fixed Assets	$15,000
Total Assets	$38,000

Liabilities	Amount ($)
Current Liabilities
Accounts Payable	$3,000
Total Current Liabilities	$3,000
Non-Current Liabilities
Loan Payable	$7,000
Total Non-Current Liabilities	$7,000
Total Liabilities	$10,000

Equity	Amount ($)
Capital	$12,000
Retained Earnings	$5,000
Total Equity	$17,000

Check: $38,000 (Total Assets) = $10,000 (Total Liabilities) + $17,000 (Total Equity)

Preparing a Statement of Financial Position - Service Business Example

Consider a sole trader providing consulting services with the following information as of December 31, 2023:

• Cash: $5,000
• Accounts Receivable: $2,000
• Office Equipment: $3,000
• Accounts Payable: $1,500
• Loan Payable: $4,000
• Capital: $10,000
• Retained Earnings: $3,000

The Statement of Financial Position for "Sarah's Consulting" would be:

Assets	Amount ($)
Current Assets
Cash	$5,000
Accounts Receivable	$2,000
Total Current Assets	$7,000
Fixed Assets
Office Equipment	$3,000
Total Fixed Assets	$3,000
Total Assets	$10,000

Liabilities	Amount ($)
Current Liabilities
Accounts Payable	$1,500
Total Current Liabilities	$1,500
Non-Current Liabilities
Loan Payable	$4,000
Total Non-Current Liabilities	$4,000
Total Liabilities	$5,500

Equity	Amount ($)
Capital	$10,000
Retained Earnings	$3,000
Total Equity	$13,000

Check: $10,000 (Total Assets) = $5,500 (Total Liabilities) + $13,000 (Total Equity)

Important Considerations

The statement of financial position provides valuable information about a sole trader's financial health. It helps assess the business's solvency (ability to pay its debts) and its financial structure (the mix of debt and equity financing).