Final Account of a Sole Trader | Jamb(UTME) Principles of Accounts

Final Accounts of a Sole Trader

1. Final accounts show the financial results of the business.
2. They consist of the income statement and statement of financial position.
3. Sole traders prepare accounts annually to assess performance.
4. Final accounts help determine profitability and financial health.
5. They assist in tax calculation and compliance.
6. Final accounts provide information for external stakeholders.
7. They help track owner’s equity changes.
8. Final accounts aid in business planning and forecasting.
9. They include adjustments for accruals and prepayments.
10. Depreciation is accounted for in final accounts.
11. Provision for bad debts is included in final accounts.
12. Final accounts help assess liquidity and solvency.
    paragraph

Income Statement (Trading and Profit & Loss Account)

13. The trading account calculates gross profit or loss.
14. Sales revenue appears at the top of the trading account.
15. Cost of sales is deducted to find gross profit.
16. Profit and loss account determines net profit or loss.
17. Operating expenses reduce gross profit.
18. Income statements include other incomes like interest received.
19. Depreciation is charged as an expense.
20. Provisions for bad debts reduce net income.
21. Discount allowed is recorded as an expense.
22. Accrued expenses increase total expenses.
23. Prepaid expenses are deducted from expenses.
24. Net profit is transferred to capital account.
    paragraph

Statement of Financial Position (Balance Sheet)

25. The balance sheet shows assets, liabilities, and capital.
26. Assets are classified into current and non-current.
27. Liabilities are split into current and long-term.
28. Owner's capital reflects the investment by the sole trader.
29. Net assets equal capital employed.
30. Balance sheet must balance: assets = liabilities + capital.
31. Accruals increase current liabilities.
32. Prepayments reduce current liabilities.
33. Provision for doubtful debts reduces trade receivables.
34. Provision for depreciation reduces the value of assets.
35. Closing capital includes retained profits.
36. Non-current assets are reported at net book value.
    paragraph

Adjustments to Balance Sheet

37. Accrued expenses are added to liabilities.
38. Prepaid expenses are deducted from expenses and treated as current assets.
39. Depreciation reduces asset value and is recorded as an expense.
40. Provision for bad debts reduces receivables.
41. Provision for discounts is deducted from receivables.
42. Closing inventory is added to assets.
43. Drawings are deducted from capital.
44. Additional capital introduced increases proprietor’s capital.
45. Unrecorded liabilities are included in balance sheet adjustments.
46. Errors detected in trial balance are corrected in adjustments.
    paragraph

Provision for Bad and Doubtful Debts

47. It estimates potential customer defaults.
48. It reduces the value of trade receivables.
49. Provision is charged as an expense in profit and loss.
50. Increases in provision reduce profits.
51. Decreases in provision increase profits.
52. Provision improves balance sheet accuracy.
53. It is based on past experience and judgment.
54. It aligns with prudence concept of accounting.
55. Provision for doubtful debts is separate from actual bad debts.
56. Provisions are reviewed periodically.
    paragraph

Provision for Discounts

57. It estimates likely future discounts to customers.
58. Discount provisions reduce accounts receivable.
59. They are recorded as expenses in income statement.
60. Provision encourages realistic receivables reporting.
61. Provision for discounts aligns with prudence.
62. It supports accurate profit measurement.
63. Provision helps in reflecting future obligations.
64. Adjustments to provisions affect net profit.
    paragraph

Provision for Depreciation (Straight-line and Reducing Balance)

65. Straight-line charges equal depreciation yearly.
66. Reducing balance charges higher depreciation in early years.
67. Depreciation reflects asset usage over time.
68. It is recorded as an expense in income statement.
69. Accumulated depreciation reduces asset value on the balance sheet.
70. Straight-line suits assets with uniform utility.
71. Reducing balance suits assets losing value quickly.
72. Depreciation affects net profit and asset values.
73. It helps match cost of assets to periods benefiting from them.
74. Depreciation ensures true and fair view of accounts.
75. Depreciation protects against overstated asset values.
76. Depreciation provision is revisited annually.
    paragraph

Accruals and Prepayments

77. Accruals recognize expenses incurred but unpaid.
78. Prepayments recognize expenses paid in advance.
79. Accruals increase current liabilities.
80. Prepayments appear as current assets.
81. Accrual accounting ensures expense recognition in the right period.
82. Prepayments reduce current period expenses.
83. Accrued income boosts current period income.
84. Deferred income delays income recognition.
85. Accruals and prepayments improve income statement accuracy.
86. They align with the matching concept.
87. Adjustments are made at period-end.
88. They prevent misstated profits.
    paragraph

Determine Cost of Sales, Gross Profit, and Net Profit

89. Cost of sales = Opening inventory + Purchases - Closing inventory.
90. Gross profit = Sales - Cost of sales.
91. Expenses reduce gross profit to net profit.
92. Net profit reflects the true profitability.
93. Discounts received reduce cost of purchases.
94. Freight and carriage inwards increase cost of sales.
95. Accurate inventory valuation ensures correct gross profit.
96. Operating expenses reduce net profit.
97. Interest income increases net profit.
98. Provision adjustments affect net profit.
    paragraph

Identify Non-Current Assets, Current Assets, Long-Term Liabilities, Current Liabilities, Proprietor’s Capital

99. Non-current assets include equipment, vehicles, and buildings.
100. Current assets include inventory, cash, and receivables.
101. Long-term liabilities include loans repayable beyond a year.
102. Current liabilities include trade payables and accrued expenses.
103. Proprietor’s capital reflects the owner’s net investment.
104. Drawings reduce proprietor’s capital.
105. Profits increase proprietor’s capital.
106. Depreciation reduces non-current asset values.
107. Provision for doubtful debts reduces current assets.
108. Short-term bank overdrafts are current liabilities.
109. Mortgage loans are long-term liabilities.
110. Inventory turnover affects current asset management.
     paragraph

Compute Adjustable Items in Statement of Profit or Loss

111. Accrued expenses increase expense totals.
112. Prepaid expenses reduce current expenses.
113. Increase in depreciation raises expenses.
114. Increase in provision for bad debts raises expenses.
115. Provision for discounts adjusts revenue figures.
116. Adjusted interest expenses affect profit.
117. Stock adjustments affect cost of sales.
118. Income earned but not yet received increases revenue.
119. Over-provision reversals boost profits.
120. Adjustments align reported profit with actual performance.
     paragraph

Differentiate Between Bad Debts and Provision for Bad and Doubtful Debts

121. Bad debts are confirmed losses.
122. Provision anticipates future potential losses.
123. Bad debts are written off directly.
124. Provision reduces receivables but retains hope of collection.
125. Bad debts are irreversible; provisions can change.
126. Provision reflects prudence and conservatism.
127. Bad debts reduce both receivables and profit.
128. Provision is an estimate based on experience.
129. Bad debts arise from specific customer defaults.
130. Provision covers a broader range of potential defaults.
     paragraph

Additional/Wrap-Up Points

131. Final accounts are essential for financial reporting.
132. Adjustments ensure accuracy of financial statements.
133. Depreciation reflects asset usage and wear.
134. Accruals ensure period-matching of expenses.
135. Provision for discounts improves receivables realism.
136. Accurate profit measurement supports decision-making.
137. The balance sheet provides a snapshot of financial health.
138. Income statement tracks financial performance over time.
139. Provision practices reflect cautious financial management.
140. Understanding adjustments strengthens accounting accuracy.
     paragraph

I recommend you check my article on the following: