Preparation of Financial Statements for Sole Traders

Vocabulary flashcards covering the preparation of financial statements, including sections of the statement of profit or loss, financial position, statement of affairs, and assessment through accounting ratios.

Statement of profit or loss

A statement prepared for a trading period to show the gross profit and the profit for the year.

Trading section

The part of the statement of profit or loss that shows the calculation of the gross profit.

Profit and loss section

The part of the statement of profit or loss that shows the calculation of the profit for the year.

Cost of sales

The calculation of purchases adjusted to align with the financial period, including opening inventory, closing inventory, carriage inwards, and goods taken by the owner.

Gross profit

The result of subtracting the cost of sales from revenue.

Operating profit

Also known as profit from operations, it is the profit for the year before subtracting the loan interest.

Statement of profit or loss (Service Business)

A financial statement that does not have a trading section or gross profit because the business does not buy or sell goods.

Statement of financial position

A financial statement showing the position of the business in terms of its assets, liabilities, and capital at a particular date.

Intangible non-current assets

Non-current assets that do not have a physical form but still add value to the business, such as intellectual property, goodwill, and brand names.

Tangible non-current assets

Physical non-current assets obtained to help the business generate profit rather than for resale, such as equipment, machinery, and land.

Net book value

The value of a non-current asset calculated by subtracting accumulated depreciation from the cost: $\text{Cost} - \text{Accumulated depreciation}$.

Liquidity

The order in which assets are listed in the statement of financial position, starting with the least liquid assets.

Statement of affairs

A statement similar to a statement of financial position prepared for a business that has not used a full set of accounting records to find a missing capital figure.

Accounting equation for Capital

The rearranged formula used in a statement of affairs: $\text{Capital} = \text{Assets} - \text{Liabilities}$.

Profit calculation (Reararranged formula)

Calculated as: $\text{Profit or loss} = \text{Closing capital} - \text{Opening capital} + \text{Drawings} - \text{Capital introduced}$.

Sales ledger control account

A ledger account used to find missing values related to trade receivables, such as credit sales, receipts, or discounts allowed.

Purchases ledger control account

A ledger account used to find missing values related to trade payables, such as credit purchases, payments, or discounts received.

Cash book

A record used to find information about amounts paid and received, including cash sales, cash purchases, and capital introduced.

Gross profit margin formula

$$\frac{\text{Gross profit}}{\text{Revenue}} \times 100$$

Mark-up formula

$$\frac{\text{Gross profit}}{\text{Cost of sales}} \times 100$$

Rate of inventory turnover formula

$$\frac{\text{Cost of sales}}{\text{Average inventory}}$$

Average inventory formula

$$\frac{\text{Opening inventory} + \text{Closing inventory}}{2}$$