Preparing Financial Accounting Information – Sole traders
PREPARING FINANCIAL ACCOUNTING
INFORMATION
Capital
This is the money (or other assets) provided by the owner in order to start the business. This is sometimes referred to
as NET WORTH – how much the business is worth when all liabilities have been paid.
SOLE TRADERS
DEBTORS AND CREDITORS
A sole trader is the name given to a business owned by one person. Examples of sole traders
could include businesses like newsagents, hairdressers, grocery shops, taxi drivers or cafés
and restaurants.
••The owner gets to keep all
the profits – so there is the
opportunity to earn a lot of money.
••The owner gets to make all the
decisions on how to run the
business – they are their own
boss.
••It involves a lot of hard work and the owner may find it
difficult to get time off or have a holiday.
••Sometimes the owner has to do all the work on his own –
there is no one there to help or offer advice or expertise.
••The owner will be responsible if the business does not do well
and incurs losses.
••The owner could actually lose his/her personal belongings, for
example, their house or car to pay off the businesses debts.
RAISING FINANCE
A sole trader will probably need some
money of his/her own to start up the
business. However they may also need to
raise money in the form of a loan from a
bank or building society.
When a sole trader borrows money from
a bank or building society they have to be
sure that they can make regular monthly
payments to pay the money back and, of
course, they are likely to be charged interest.
Sources of Finance
Head to www.
brightredbooks.net/
N5Accounting to find out
more about various Prince’s
Trust loans.
•
•
Loans from family and friends
Loans from banks or building societies
•
•
Government grants
Enterprise grants, for example, from
Prince’s Trust
THE BALANCE SHEET – THEORY
All businesses usually prepare a Balance Sheet at least once per year. A Balance Sheet is
a STATEMENT which shows the value of the assets, liabilities and capital of a sole trader.
Fixed Assets
These are large items owned by the business and which are likely to be in the business
for many years. They are likely to be items of high value. Examples of Fixed Assets are
buildings, land, machinery, motor vehicles, fixtures and fittings and office equipment.
Without Fixed Assets the business would probably not be able to operate.
Current Assets
Current Liabilities
These are smaller items of value owned by
a business which will be kept for less than
one full year. Their value changes from day
to day. Examples of Current Assets include
stock, debtors, bank and cash.
These are items owed by the business
and they will normally have to be re-paid
within one year. Examples of Current
Liabilities are small loans, bank overdrafts
and creditors.
Long Term Liabilities
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N5_Accounting_sample.indd 6-7
These are long term debts of the business and will usually take many years to re-pay.
Examples of Long Term Liabilities are large loans (£100,000) from banks to purchase
buildings or expensive machinery and mortgages. The business will have to re-pay a
certain amount each year over a 10–20 year period.
SAMPLE PAGES – N5 ACCOUNTING
ADVANTAGES/DISADVANTAGES OF BEING A SOLE TRADER
What is a Debtor?
What is a Creditor?
A debtor is another business or person who owes the business money.
Debtors are Current Assets.
A creditor is another business or person who the business owes money to.
Creditors are Current Liabilities.
LAYOUT OF A BALANCE SHEET
All Balance Sheets should be displayed as shown below. They should be presented
neatly and all calculations should be accurate.
John Bannerman – Balance Sheet as at 31 December 20..
FIXED ASSETS
£
Buildings
Machinery
Equipment
Motor Vehicles
CURRENT ASSETS
Stock
Debtors
Bank
Cash
CURRENT LIABILITIES
Creditors
Loan
Overdraft
Net Current Assets/Working Capital
£
£
100,000
90,000
40,000
20,000
250,000
25,000
15,000
10,000
5,000
55,000
5,000
3,000
2,000
Both sections of the Balance
Sheet must agree! Fixed
Assets when added to Net
Current Assets should agree
with Capital Invested and
Long Term Liabilities.
10,000
FINANCED BY
Capital
LONG TERM LIABILITIES
Loan
45,000
295,000
200,000
95,000
295,000
How well have you learned
this topic? Head to www.
brightredbooks.net/
N5Accounting and take the
test.
Answer the following questions in sentences on A4 lined paper.
Question
1
2
3
4
5
6
7
8
9
10
11
12
Outline the purpose of preparing a Balance Sheet.
Explain what is meant by Fixed Assets.
List 4 examples of Fixed Assets.
Explain what is meant by a Current Asset.
List 4 examples of Current Assets.
Explain what is meant by a Debtor.
Explain what is meant by Current Liabilities.
Explain what is meant by a Creditor.
What is a Bank Overdraft?
Explain what is meant by the term Net Current Assets.
State the term used to describe the money used to start up a business.
Explain, using an example, what is meant by Long Term Liabilities.
Marks
1
2
4
2
4
1
2
1
1
2
1
2
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17/06/2014 13:46
Preparing Financial Accounting Information – Preparing a Balance Sheet
PREPARING FINANCIAL ACCOUNTING INFORMATION
PREPARING A BALANCE SHEET
EXERCISES ON BALANCE SHEETS
1
(a) C
opy the table below into your worksheet then prepare the Balance Sheet of
L Dawson as at 31 May 20 from the following information:
(Identify the section of the Balance Sheet where each item will be included by placing
a tick in the appropriate column).
10 STEPS FOR PREPARING A BALANCE SHEET
Write the name of the business and the title “Balance Sheet as at (appropriate date)”
Step 2
List all of the Fixed Assets – start with the most expensive Fixed Asset. Once you have them all
listed, total them.
Step 3
List all of the Current Assets – they should be listed in order of liquidity, for example, stock,
debtors, bank and then cash. Once you have them all listed, total them.
Step 4
List all of the Current Liabilities. Total the Current Liabilities and transfer the total to the column
containing the Current Assets.
Step 5
Subtract Current Liabilities from your Current Assets and transfer the answer to the Fixed Asset
Column. This figure should then be labelled Net Current Assets/Working Capital.
Step 6
Add Net Current Assets/Working Capital to the total Fixed Assets. You have now completed the
first half of the Balance Sheet.
Step 7
Enter the heading “Financed By”.
Step 8
Under this heading place your Capital figure.
Step 9
Enter the heading “Long Term Liabilities. List your Long Term Liabilities below your Capital figure.
Step 10 Add Capital and Long Term Liabilities together.
PREPARING BALANCE SHEETS USING A SPREADSHEET
This example shows the
formulas required to prepare
the Balance Sheet for
Exercise 1b on p9.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
A
B
C
L Dawson
Balance Sheet as at 31 May 20..
D
E
F
£
£
£
FIXED ASSETS
Capital
Premises
Vehicles
10,000
5,000
4,000
=sum(F5:F7)
CURRENT ASSETS
Debtors
Stock
Bank
CURRENT LIABILITIES
Creditors
Loan
NET CURRENT ASSETS
1,000
1,500
500
=sum(E11:E13)
2,000
100
N5_Accounting_sample.indd 8-9
Item
Capital, £9,900
Premises, £5,000
Motor Vehicles, £4,000
Debtors, £1,000
Stock, £1,500
Bank, £500
Loan, £100
Creditors, £2,000
Fixed Asset
Current Asset
Current Liability
Financed By
Current Assets should be
listed in order of liquidity –
stock, debtors, bank and cash.
(b) Open the spreadsheet template BSSS.
Enter the details from Exercise 1 under the appropriate heading.
Insert appropriate formulas to undertake all calculations.
Insert your name, exercise 1b and today’s date in the footer.
Save the document as Ex1bss and print one copy.
2
(a) C
opy the table below into your worksheet then prepare the Balance Sheet of
J McDonald as at 30 November 20 from the following information:
(Identify the section of the Balance Sheet where each item will be included by placing
a tick in the appropriate column).
Item
Capital £12,000
Mortgage £9,000
Premises £10,000
Fittings £4,000
Stock £3,000
Debtors £2,000
Bank £1,500
Cash £500
Fixed Asset
Current Asset
Current Liability
Financed By
(b) Open the spreadsheet template BSSS.
Enter the details from Exercise 2 under the appropriate heading.
Insert appropriate formulas to undertake all calculations.
Insert your name, exercise 2b and today’s date in the footer.
Save the document as Ex2bss and print one copy.
=sum(D17:D18)
FINANCED BY
Capital
• To total a range of numbers we use the formula =sum(F5:F7)
• To add two numbers we use the simple formula =F8+F19
• To subtract two numbers we use the formula =E14-E18
8
SAMPLE PAGES – N5 ACCOUNTING
Remember the importance
of good presentation – use a
ruler. You should also double
check all your calculations
using a calculator.
Step 1
Fixed Assets should be shown
in order of value, i.e. the
highest valued fixed asset
shown first and then the next
highest in value shown second
and so on.
=E14-E18
=F8+F19
All organisations will have some Fixed Assets. Think about the following organisations:
9,900
You should now try to provide two examples of Fixed Assets that would appear on the
balance sheets of the organisations shown in the list above.
1 Schools
2 Hospitals
3 Supermarkets
4 Local corner shops
5 Libraries
6 Health clubs
You yourself are likely to have some personal Fixed Assets. Write down three examples
of Fixed Assets that you possess.
Test your knowledge of
preparing Balance Sheets at
www.brightredbooks.net/
N5Accounting
For more practice activities
on preparing Balance Sheets,
head to www.brightredbooks.
net/N5Accounting
Finally, remember that practice makes perfect – the more you practise preparing Balance
Sheets, the more likely you are to succeed in your National 5 Accounting course.
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17/06/2014 13:46