Sole Trader Accounts

Goods for Own Use, Asset Disposal, Inventory Valuation and Capital vs Revenue Expenditure

Goods for Own Use

Goods for own use — inventory taken from the business by the sole trader for their own private (non-business) use.

Goods on Sale or Return

When a business holds goods on a sale or return basis from a supplier:

• If the goods have not yet been sold, they remain the supplier's inventory — do not include in the business's purchases or inventory
• If the goods have been sold, the sale is realised and income is recorded

This applies the realisation concept — income is only recognised when the legal right to receive it has been established.

Inventory Valuation

Inventory is valued at the lower of cost and net realisable value (NRV).

• Cost — the original purchase price of the inventory
• Net realisable value (NRV) — the estimated selling price less any costs still needed to complete or sell the goods

Prudence concept: If NRV < cost, inventory is written down to NRV so that a potential loss is recognised immediately. If cost < NRV, inventory remains at cost (profit is not anticipated before the sale is made).

Note: FIFO, AVCO, and LIFO methods of inventory valuation will not be examined.

Non-Current Asset Disposal

When a non-current asset is sold, a profit or loss on disposal arises by comparing the NBV with the sale proceeds.

Formula:

NBV = Cost − Accumulated depreciation
Profit/Loss on disposal = Sale proceeds − NBV

Example (loss): Vehicle cost £9 500, accumulated depreciation £3 200, sold for £5 700. NBV = 9 500 − 3 200 = £6 300 Loss on disposal = 5 700 − 6 300 = (£600)

Adjusting the SFP when disposal details are in additional information: Remove the disposed asset from the non-current assets section:

• Cost column: deduct the disposed asset's cost
• Accumulated depreciation column: deduct the disposed asset's accumulated depreciation
• Add the sale proceeds to bank/cash in current assets

If the profit/loss on disposal is already listed in the trial balance, include it in the income statement only — do not adjust SFP cost and depreciation columns again.

Capital Expenditure vs Revenue Expenditure

Key rule: Delivery and installation costs to make an asset useable are capital expenditure — they are added to the asset's cost (and depreciated). Training costs for staff, ongoing energy and insurance costs are revenue expenditure — they are charged to the income statement.

Example: Machinery purchased for £125 000; delivery £6 250; installation £15 000. Capital expenditure (cost of asset) = 125 000 + 6 250 + 15 000 = £146 250 Depreciation (20% straight line) = 146 250 × 20% = £29 250

Training (£8 750), energy (£2 950), insurance (£1 675), wages (£12 650), and depreciation (£29 250) are all revenue expenditure = £55 275