Sole Traders

Objective: Understand that statements of financial position record assets and liabilities on a specified date

What is a Sole Trader?

A sole trader is a business owned and run by one person. There is no legal distinction between the owner and the business. The owner receives all the profits but is also personally liable for all the business's debts.

Statement of Financial Position (SFP)

A Statement of Financial Position (also known as a Balance Sheet) is a snapshot of a business's assets, liabilities, and equity at a specific point in time. It shows what the business owns (assets) and what it owes (liabilities) on a particular date.

Key Components of a Statement of Financial Position

The SFP follows the fundamental accounting equation:

Assets = Liabilities + Equity

Where:

• Assets: What the business owns. These are resources controlled by the business as a result of past events and from which future economic benefits are expected.
• Liabilities: What the business owes to others. These are obligations to external parties.
• Equity: The owners' stake in the business. This is the residual interest in the assets after deducting liabilities. For a sole trader, equity is typically referred to as the owner's capital.

Assets

Assets are usually classified as:

• Current Assets: Assets that are expected to be converted to cash or used up within one year. Examples include:
• Cash at bank
• Petty cash
• Debtors (money owed to the business by customers)
• Stock (inventory)
• Fixed Assets: Assets that are expected to provide benefit to the business for more than one year. Examples include:
• Equipment
• Vehicles
• Buildings

Liabilities

Liabilities are usually classified as:

• Current Liabilities: Liabilities that are expected to be paid within one year. Examples include:
• Creditors (money owed by the business to suppliers)
• Overdraft
• Income Tax
• National Insurance
• Long-term Liabilities: Liabilities that are not expected to be paid within one year. Examples include:
• Loans
• Mortgages

Equity (Capital)

For a sole trader, equity represents the owner's investment in the business. It is the difference between the total assets and the total liabilities.

Example Statement of Financial Position for a Sole Trader (as at December 31, 2023)

Assets	Amount (£)
Cash at Bank	£2,000
Debtors	£1,500
Stock	£800
Equipment	£3,000
Total Assets	£7,300

Liabilities	Amount (£)
Creditors	£1,200
Overdraft	£500
Total Liabilities	£1,700

Equity (Capital)	Amount (£)
Owner's Capital	£5,600

Total Liabilities + Equity = Total Assets

£1,700 + £5,600 = £7,300

Importance of the Statement of Financial Position

The SFP is important because it provides information about the financial health of the sole trader's business on a specific date. It helps to assess:

• The business's ability to pay its debts (liquidity).
• The level of financial risk the business is taking.
• The owner's investment in the business.