Overview of Sole Trader Financial Statements
Sole trader financial statements consist of two documents prepared at the end of each financial year:
- Income statement — shows all income and expenditure for the year; determines profit or loss
- Statement of financial position — shows all assets, liabilities and capital at the year-end date; a snapshot in time
Source of Information
Both statements are prepared from either:
- A trial balance (a list of all ledger account balances), or
- A list of extracted balances
…together with any additional information (adjustments not yet reflected in the trial balance).
General Rules
- Every statement must carry a full title — business name, statement name, and date — with no abbreviations
- The income statement uses the heading "for the year ended [date]" because it covers a period of time
- The statement of financial position uses the heading "at [date]" because it is a snapshot at a single point in time
- Both statements have a prescribed layout with set headings; presentation is awarded marks
- The income statement must be produced first because the profit for the year figure it calculates is needed in the capital section of the statement of financial position
- The statement of financial position is arithmetically correct when: total assets = total capital + total liabilities (the accounting equation)