Study guide
9.1 Sole Trader Statement of Profit or Loss
AAT Level 3 Diploma in Accounting Q2022
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1 Chapter 1: Accounting Principles & Ethical Framework
1.1 Fundamental Accounting Concepts & Assumptions 1.2 Regulatory Framework & IAS/IFRS Terminology 1.3 Professional Ethics & the AAT Code of Conduct
2 Chapter 2: Advanced Double-Entry Bookkeeping & Control Accounts
2.1 Capital vs. Revenue Expenditure & Prime Entry Books 2.2 Control Accounts & Reconciliation Procedures 2.3 Period-End Routines, Verification & Accounting Software
3 Chapter 3: Accounting Errors & The Suspense Account
3.1 Types of Accounting Errors & Trial Balance Impact 3.2 Correcting Errors & Clearing the Suspense Account
4 Chapter 4: Non-Current Assets: Acquisition, Register & Disposal
4.1 Capitalising Non-Current Assets & The Asset Register 4.2 Disposal of Non-Current Assets & Part-Exchange
5 Chapter 5: Depreciation Methods & Accounting Entries
5.1 Straight-Line & Reducing Balance Depreciation 5.2 Depreciation Accounting Policies & Journal Entries
6 Chapter 6: Period-End Adjustments: Accruals, Prepayments & Inventory
6.1 Accrued & Prepaid Expenses and Income 6.2 Closing Inventory Valuation & IAS 2 Rules
7 Chapter 7: Period-End Adjustments: Irrecoverable Debts & Allowances
7.1 Writing Off Irrecoverable Debts & Debt Recovery 7.2 Allowance for Doubtful Receivables 7.3 Professional Scepticism, Ethics & Period-End Pressures
8 Chapter 8: The Extended Trial Balance (ETB)
8.1 Trial Balance Structure & Initial Preparation 8.2 Recording Adjustments & Completing the Extended Trial Balance
9 Chapter 9: Financial Statements: Sole Traders
9.1 Sole Trader Statement of Profit or Loss 9.2 Sole Trader Statement of Financial Position
10 Chapter 10: Financial Statements: Partnerships
10.1 Partnership Principles & The Partnership Act 1890 10.2 Partnership Appropriation Account & Capital/Current Accounts
11 Chapter 11: Financial Statement Analysis & Ratios
11.1 Profitability & Return on Capital Employed 11.2 Liquidity, Working Capital & Efficiency Ratios
12 Chapter 12: Incomplete Records & Reconstructing Accounts
12.1 The Capital Comparison Method & Cash/Bank Summaries 12.2 Mark-up, Margin & Account Reconstruction 12.3 Testing the Reasonableness of Reconstructed Figures
9.1 Sole Trader Statement of Profit or Loss
Key Takeaways Explain This Topic AI
The Statement of Profit or Loss (SPL) measures a sole trader's financial performance over a defined accounting period in accordance with IAS 1 and FRS 102 accruals concepts.
The Trading Account section calculates Gross Profit: Net Sales Revenue (Gross Sales less Returns Inwards) less Cost of Sales (Opening Inventory + Purchases + Carriage Inwards - Purchases Returns - Goods Taken for Personal Use at Cost - Closing Inventory).
Carriage Inwards represents a direct cost of bringing goods into salable condition and is included in Cost of Sales, whereas Carriage Outwards is a selling and delivery expense classified under Operating Expenses.
Goods taken by the proprietor for personal use must be credited to the Purchases account at cost price (Debit Drawings, Credit Purchases) to avoid anticipating unrealised gross profit.
Operating Profit is derived by adding Other Operating Income (discounts received, rent receivable, disposal profits) and deducting categorized Operating Expenses; deducting Finance Costs yields Profit for the Year, which is transferred to the proprietor's Capital Account.
Last updated: August 2026
Sole Trader Statement of Profit or Loss
In financial accounting, the Statement of Profit or Loss (SPL) —historically referred to as the Trading and Profit and Loss Account —is the primary financial statement used to measure the financial performance of an entity over a specified accounting period. For a sole trader, the SPL determines the net wealth generated by commercial operations that belongs exclusively to the business owner.
Within the AAT Level 3 Financial Accounting: Preparing Financial Statements (FAPS) syllabus, sole trader financial statements are prepared in accordance with the principles of IAS 1 ( Presentation of Financial Statements ) and UK GAAP ( FRS 102 Section 5 ). The statement applies the fundamental accruals concept (matching revenues earned with expenses incurred in the period) and the prudence concept (ensuring income is not anticipated and all known liabilities and losses are recognized).
1. The Two-Tiered Structure of the Statement of Profit or Loss
A sole trader's Statement of Profit or Loss is traditionally divided into two distinct, interconnected sections:
The Trading Section : Measures the direct profitability of core buying and selling activities, culminating in Gross Profit (or Gross Loss).
The Profit or Loss (Operating) Section : Combines Gross Profit with secondary operating income, deducts administrative, selling, establishment, and non-cash operating overheads, and subtracts finance costs to determine Profit for the Year (Net Profit). ┌─────────────────────────────────────────────────────────────────────────────┐
- │ SOLE TRADER STATEMENT OF PROFIT OR LOSS ARCHITECTURE │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 1. TRADING SECTION │
- │ Revenue (Gross Sales less Sales Returns / Returns Inwards) │
- │ LESS: Cost of Sales │
- │ [Opening Inventory + Purchases + Carriage Inwards │
- │ - Purchases Returns - Goods for Own Use (Cost) - Closing Inv] │
- │ EQUALS: GROSS PROFIT │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 2. OTHER OPERATING INCOME │
- │ ADD: Discounts Received, Rent Receivable, Disposal Gains, etc. │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 3. OPERATING EXPENSES (Overheads) │
- │ LESS: Selling & Distribution Expenses (incl. Carriage Outwards) │
- │ Establishment & Occupancy Costs │
- │ Administration & Office Costs │
- │ Non-Cash Charges (Depreciation, Bad Debts Written Off, etc.) │
- │ EQUALS: OPERATING PROFIT │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 4. FINANCE COSTS │
- │ LESS: Bank Loan Interest, Overdraft Interest │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 5. BOTTOM LINE: PROFIT FOR THE YEAR (Transferred to Capital Account) │
- └─────────────────────────────────────────────────────────────────────────────┘
- 2. The Trading Section: Revenue and Cost of Sales Mechanics
The trading section determines the margin generated on goods sold before considering operational overheads.
Net Sales Revenue
Gross Sales Revenue : The total invoiced value of goods sold on credit and for cash during the accounting period (excluding VAT).
Returns Inwards (Sales Returns) : Goods returned by customers due to faults, transit damage, or incorrect specification. These are deducted directly from gross sales: Net Revenue = Gross Sales − Returns Inwards (Sales Returns) \text{Net Revenue} = \text{Gross Sales} - \text{Returns Inwards (Sales Returns)} Net Revenue = Gross Sales − Returns Inwards (Sales Returns)
The Cost of Sales Equation in Full
Cost of Sales reflects the direct acquisition and delivery cost of the physical units that were actually sold during the period: Opening Inventory (Valued at lower of cost and NRV at start of year)
- + Purchases (Gross credit and cash purchases of trading inventory)
- + Carriage Inwards (Freight and delivery costs to bring goods into the business)
- Purchases Returns / Returns Outwards (Goods returned to trade suppliers)
- Goods Taken for Personal Use (Inventory withdrawn by owner, valued at COST)
- ─────────────────────────────────────────────────────────────────────────────
- = Cost of Goods Available for Sale
- Closing Inventory (Valued at lower of cost and NRV at end of year)
- ─────────────────────────────────────────────────────────────────────────────
- = COST OF SALES
- Crucial Distinction: Carriage Inwards vs. Carriage Outwards
One of the most frequently tested concepts in AAT Level 3 assessments is the proper accounting classification of delivery charges:
Feature Carriage Inwards Carriage Outwards
Definition Freight/haulage paid by the business to transport purchased goods from suppliers to its premises. Carriage/delivery paid by the business to deliver finished goods sold to its customers.
Accounting Classification Direct Cost of Acquisition included in Cost of Sales (Trading Section). Operating Overhead included in Selling & Distribution Expenses (SPL Expense).
Impact on Gross Profit Increases Cost of Sales → \rightarrow → Reduces Gross Profit . No impact on Gross Profit ; reduces Operating Profit and Net Profit.
Theoretical Rationale Directly attributable to bringing inventory to its present location and condition (IAS 2). Incurred after the sale has taken place as part of customer fulfilment.
Goods Taken for Personal Use (Drawings of Inventory)
In sole trader businesses, proprietors frequently withdraw trading stock for their own personal or household consumption.
The Valuation Rule: Valued at Cost (Never Selling Price)
The Rule : When an owner withdraws inventory, it must be removed from the business accounts at Cost Price .
The Rationale : A business cannot legally or economically make a profit by selling goods to its owner. If goods were removed at selling price, the business would recognize unrealised profit in the Statement of Profit or Loss, directly violating the Prudence Concept and the Realisation Principle .
Double-Entry Accounting Treatment:
Debit : Drawings Account (SFP Equity reduction) with the cost of the goods.
Credit : Purchases Account (SPL Cost of Sales reduction) with the cost of the goods. Date Account Titles & Explanation Debit (£) Credit (£)
- 20X5
- Dec 31 Drawings (Proprietor's Equity) 2,000
- Purchases (Cost of Sales) 2,000
- (To record trading inventory withdrawn by
- proprietor for personal use at cost price)
Exam Warning : In examination questions, examiners often provide both the cost price (£2,000) and the normal selling price (£3,100) of withdrawn goods. Always deduct the cost price (£2,000) from Purchases in the trading section and debit Drawings with £2,000. Never adjust the Sales account for owner drawings!
3. Other Operating Income
Secondary income streams that arise outside the core trading of goods are credited below Gross Profit in the profit and loss section:
Discounts Received : Prompt payment cash discounts received from credit suppliers for settling accounts within agreed terms.
Rent Receivable : Subletting unused warehouse or office space to a third party (adjusted for accrued or deferred rent).
Profit on Disposal of Non-Current Assets : Proceeds of disposal exceeding the net carrying amount (carrying value) at the disposal date.
Decrease in Allowance for Doubtful Receivables : When the closing allowance requirement is lower than the opening allowance brought forward.
Bad Debts Recovered : Cash collected from credit customers whose debts were previously written off as irrecoverable in a prior accounting period.
4. Operating Expenses & Expense Categorization
Operating expenses represent the operational and administrative overheads required to run the enterprise. Under IAS 1 and best practice, expenses are grouped into functional categories:
1. Selling & Distribution Expenses
Directly related to marketing, selling, and delivering products to customers:
- Carriage Outwards (delivery to customers)
- Sales staff salaries and commissions
- Advertising, marketing campaigns, and website hosting
- Delivery vehicle running costs, insurance, fuel, and road tax
- 2. Establishment & Occupancy Expenses
Costs associated with occupying and maintaining operational premises:
- Rent and local authority business rates (net of prepayments/accruals)
- Light, heat, and power (electricity and gas)
- Property insurance and security services
- Premises repairs and building maintenance
- 3. Administrative & General Expenses
General corporate management and office support overheads:
- Office administrative salaries and management wages
- Telephone, broadband, and IT software subscriptions
- Printing, stationery, and postage
- Audit, accountancy, and legal professional fees
- Bank charges (excluding interest)
- 4. Non-Cash Charges & Adjustments
Accounting adjustments reflecting asset depreciation and credit risk:
Depreciation Charges : Annual depreciation on plant, machinery, fixtures, fittings, and motor vehicles.
Irrecoverable (Bad) Debts Written Off : Debts deemed uncollectible during the period.
Increase in Allowance for Doubtful Receivables : Upward adjustment required to match estimated default risk.
- 5. Finance Costs and Transfer to Capital
- Finance Costs
Finance costs represent the cost of borrowed external capital. Under IAS 1, finance costs must be disclosed separately from operating expenses below Operating Profit:
- Bank loan interest (incurred during the period, whether paid or accrued)
- Bank overdraft interest
- Mortgage interest
- Profit for the Year (Net Profit) & Capital Transfer
Operating Profit = Gross Profit + Other Operating Income − Total Operating Expenses \text{Gross Profit} + \text{Other Operating Income} - \text{Total Operating Expenses} Gross Profit + Other Operating Income − Total Operating Expenses
Profit for the Year = Operating Profit − Finance Costs \text{Operating Profit} - \text{Finance Costs} Operating Profit − Finance Costs
At the end of the financial year, the net profit or net loss is closed off to the proprietor's Capital Account :
For a Profit : Debit Statement of Profit or Loss , Credit Capital Account .
For a Loss : Debit Capital Account , Credit Statement of Profit or Loss .
6. Comprehensive Master Worked Case Study: Beacon Hill Traders
To see the complete Statement of Profit or Loss constructed from primary trial balance data and year-end adjustments, review the comprehensive case of Beacon Hill Traders (Sole Proprietor: Arthur Pendelton) for the year ended 31 December 20X5 .
- Trial Balance Extracts at 31 December 20X5 (Pre-Adjustments) Account Title Debit (£) Credit (£)
- Sales Revenue 320,000
- Sales Returns (Returns Inwards) 4,800
- Purchases 165,000
- Purchases Returns (Returns Outwards) 3,200
- Carriage Inwards 2,400
- Carriage Outwards 3,100
- Opening Inventory (1 January 20X5) 24,000
- Discounts Received 1,650
- Sublet Rental Income 4,200
- Plant & Machinery (Cost £50,000; Acc Dep £15,000)
- Motor Vehicles (Cost £32,000; Acc Dep £12,000)
- Fixtures & Fittings (Cost £20,000; Acc Dep £6,000)
- Rent and Business Rates 18,000
- Heat, Light & Power 4,100
- Building Insurance 3,500
- Wages and Salaries 42,000
- Advertising & Marketing 5,400
- Delivery Van Running Costs 4,200
- Telephone & Broadband 1,650
- Accountancy & Audit Fees 2,000
- General Sundry Expenses 1,500
- Trade Receivables (Gross) 38,200
- Allowance for Doubtful Receivables (1 Jan 20X5) 2,200
- Bank Loan Interest Paid 1,800
- Bank Overdraft Interest 300
- 8% Long-Term Bank Loan (repayable 20X9) 30,000
Year-End Adjusting Information at 31 December 20X5:
Closing Inventory : Counted at 31 December 20X5 and valued at lower of cost and NRV at £28,500 .
Goods Taken for Own Use : Arthur Pendelton took goods for personal use during the year with a cost price of £2,000 (normal retail selling price £3,100). No entry has yet been made in the books.
Accruals & Prepayments :
Business rates prepaid at 31 Dec 20X5: £1,500 .
Building insurance prepaid at 31 Dec 20X5: £700 .
Electricity accrued at 31 Dec 20X5: £800 .
Telephone accrued at 31 Dec 20X5: £250 .
Unbilled accountancy fees accrued: £1,200 .
Sublet rental income includes £600 received in advance for January 20X6 (Deferred Income).
Receivables Adjustments :
An irrecoverable customer balance of £1,100 is to be written off as a bad debt.
The allowance for doubtful receivables is to be adjusted to £1,800 (a decrease of £400 from opening £2,200).
Depreciation Policy :
Plant & Machinery: 20% per annum using the reducing balance method .
Motor Vehicles: 25% per annum using the reducing balance method .
Fixtures & Fittings: 10% per annum on straight-line cost .
Disposal Gain : A small piece of office equipment was sold during the year generating a net profit on disposal of £750 (credited to suspense, now confirmed).
Loan Interest Accrual : Full annual interest on the £30,000 8% bank loan is £30,000 × 8 % = £2,400 \text{£30,000} \times 8\% = \text{£2,400} £30,000 × 8% = £2,400 . Since £1,800 was paid, an accrual of £600 is required.
Step-by-Step Adjustment Calculations
Net Revenue : £320,000 − £4,800 = £ 315 , 200 \text{£320,000} - \text{£4,800} = \mathbf{£315,200} £320,000 − £4,800 = £315 , 200
Adjusted Purchases : £165,000 − £2,000 (drawings at cost) = £ 163 , 000 \text{£165,000} - \text{£2,000 (drawings at cost)} = \mathbf{£163,000} £165,000 − £2,000 (drawings at cost) = £163 , 000
Cost of Sales : £24,000 (Opening) + £163,000 (Purchases) + £2,400 (Carriage In) − £3,200 (Returns Out) − £28,500 (Closing) = £ 157 , 700 \text{£24,000 (Opening)} + \text{£163,000 (Purchases)} + \text{£2,400 (Carriage In)} - \text{£3,200 (Returns Out)} - \text{£28,500 (Closing)} = \mathbf{£157,700} £24,000 (Opening) + £163,000 (Purchases) + £2,400 (Carriage In) − £3,200 (Returns Out) − £28,500 (Closing) = £157 , 700
Gross Profit : £315,200 − £157,700 = £ 157 , 500 \text{£315,200} - \text{£157,700} = \mathbf{£157,500} £315,200 − £157,700 = £157 , 500
Other Operating Income :
Discounts Received: £1,650
Sublet Rental Income: £4,200 − £600 (deferred) = £3,600 \text{£4,200} - \text{£600 (deferred)} = \text{£3,600} £4,200 − £600 (deferred) = £3,600
Profit on Disposal: £750
Decrease in Allowance for Receivables: £2,200 − £1,800 = £400 \text{£2,200} - \text{£1,800} = \text{£400} £2,200 − £1,800 = £400
Total Other Income = £1,650 + £3,600 + £750 + £400 = £ 6 , 400 \text{£1,650} + \text{£3,600} + \text{£750} + \text{£400} = \mathbf{£6,400} £1,650 + £3,600 + £750 + £400 = £6 , 400
Operating Expenses Calculations :
Selling & Dist : Carriage Outwards (£3,100) + Advertising (£5,400) + Van Running (£4,200) = £12,700
Establishment : Rent & Rates ( £18,000 − £1,500 = £16,500 \text{£18,000} - \text{£1,500} = \text{£16,500} £18,000 − £1,500 = £16,500 ) + Heat & Light ( £4,100 + £800 = £4,900 \text{£4,100} + \text{£800} = \text{£4,900} £4,100 + £800 = £4,900 ) + Insurance ( £3,500 − £700 = £2,800 \text{£3,500} - \text{£700} = \text{£2,800} £3,500 − £700 = £2,800 ) = £24,200
Administration : Wages & Salaries (£42,000) + Telephone ( £1,650 + £250 = £1,900 \text{£1,650} + \text{£250} = \text{£1,900} £1,650 + £250 = £1,900 ) + Accountancy ( £2,000 + £1,200 = £3,200 \text{£2,000} + \text{£1,200} = \text{£3,200} £2,000 + £1,200 = £3,200 ) + Sundry (£1,500) = £48,600
Non-Cash Charges : Bad Debts (£1,100) + Depreciation Machinery ( [ £50,000 − £15,000 ] × 20 % = £7,000 [\text{£50,000} - \text{£15,000}] \times 20\% = \text{£7,000} [ £50,000 − £15,000 ] × 20% = £7,000 ) + Depreciation Vehicles ( [ £32,000 − £12,000 ] × 25 % = £5,000 [\text{£32,000} - \text{£12,000}] \times 25\% = \text{£5,000} [ £32,000 − £12,000 ] × 25% = £5,000 ) + Depreciation Fixtures ( £20,000 × 10 % = £2,000 \text{£20,000} \times 10\% = \text{£2,000} £20,000 × 10% = £2,000 ) = £1,100 + £14,000 = £ 15 , 100 \text{£1,100} + \text{£14,000} = \mathbf{£15,100} £1,100 + £14,000 = £15 , 100
Total Operating Expenses = £12,700 + £24,200 + £48,600 + £15,100 = £ 100 , 600 \text{£12,700} + \text{£24,200} + \text{£48,600} + \text{£15,100} = \mathbf{£100,600} £12,700 + £24,200 + £48,600 + £15,100 = £100 , 600
Operating Profit : £157,500 + £6,400 − £100,600 = £ 63 , 300 \text{£157,500} + \text{£6,400} - \text{£100,600} = \mathbf{£63,300} £157,500 + £6,400 − £100,600 = £63 , 300
Finance Costs : Bank Loan Interest ( £1,800 + £600 = £2,400 \text{£1,800} + \text{£600} = \text{£2,400} £1,800 + £600 = £2,400 ) + Overdraft Interest (£300) = £2,700
Profit for the Year : £63,300 − £2,700 = £ 60 , 600 \text{£63,300} - \text{£2,700} = \mathbf{£60,600} £63,300 − £2,700 = £60 , 600
- Formal Presentation: Beacon Hill Traders Statement of Profit or Loss BEACON HILL TRADERS
- STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X5
- ─────────────────────────────────────────────────────────────────────────────
- £ £
- Revenue (Gross Sales) 320,000
- Less: Returns Inwards (Sales Returns) (4,800)
- ────────────────────────────────────────────────────────────
- Net Revenue 315,200
Cost of Sales:
- Opening Inventory 24,000
- Purchases 165,000
- Less: Goods Taken for Personal Use (at Cost) (2,000)
- Carriage Inwards 2,400
- Less: Purchases Returns (Returns Outwards) (3,200)
- ────────────────────────────────────────────────────────────
- Cost of Goods Available for Sale 186,200
- Less: Closing Inventory (28,500)
- ────────────────────────────────────────────────────────────
- Cost of Sales (157,700)
- ─────────────────────────────────────────────────────────────────────────────
- GROSS PROFIT 157,500
Other Operating Income:
- Discounts Received 1,650
- Sublet Rental Income (£4,200 - £600) 3,600
- Profit on Disposal of Equipment 750
- Decrease in Allowance for Doubtful Receivables 400
- ────────────────────────────────────────────────────────────
- Total Other Operating Income 6,400
- ─────────────────────────────────────────────────────────────────────────────
- 163,900
Operating Expenses:
Selling & Distribution Expenses:
- Carriage Outwards 3,100
- Advertising & Marketing 5,400
- Delivery Van Running Costs 4,200 12,700
Establishment & Occupancy Expenses:
- Rent and Business Rates (£18,000 - £1,500) 16,500
- Heat, Light & Power (£4,100 + £800) 4,900
- Building Insurance (£3,500 - £700) 2,800 24,200
Administrative & General Expenses:
- Wages & Salaries 42,000
- Telephone & Broadband (£1,650 + £250) 1,900
- Accountancy & Audit Fees (£2,000 + £1,200) 3,200
- General Sundry Expenses 1,500 48,600
Non-Cash Charges & Asset Adjustments:
- Irrecoverable Bad Debts Written Off 1,100
- Depreciation: Plant & Machinery (20% RB) 7,000
- Depreciation: Motor Vehicles (25% RB) 5,000
- Depreciation: Fixtures & Fittings (10% SL) 2,000 15,100
- ─────────────────────────────────────────────────────────────────────────────
- Total Operating Expenses (100,600)
- ─────────────────────────────────────────────────────────────────────────────
- OPERATING PROFIT 63,300
Finance Costs:
- Bank Loan Interest (£1,800 + £600) 2,400
- Bank Overdraft Interest 300 (2,700)
- ─────────────────────────────────────────────────────────────────────────────
- PROFIT FOR THE YEAR (Transferred to Capital Account) 60,600
- ═════════════════════════════════════════════════════════════════════════════
- 7. Closing Ledger T-Accounts at Year-End
At the financial year-end, nominal ledger expense and revenue balances are cleared to the Trading Account and Statement of Profit or Loss Account via closing journal entries, and the final net profit is transferred to the proprietor's Capital Account . TRADING ACCOUNT
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Jan 1 Opening Inventory 24,000 Dec 31 Sales Revenue 315,200
- Dec 31 Purchases 163,000 (Net of returns)
- Dec 31 Carriage Inwards 2,400 Dec 31 Purchases Returns 3,200
- Dec 31 Gross Profit c/d 157,500 Dec 31 Closing Inventory 28,500
- ────────────────────────────────────────────────────────────────────────────────
- 346,900 346,900
──────────────────────────────────────────────────────────────────────────────── STATEMENT OF PROFIT OR LOSS ACCOUNT
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Dec 31 Operating Expenses 100,600 Dec 31 Gross Profit b/d 157,500
- Dec 31 Finance Costs 2,700 Dec 31 Discounts Received 1,650
- Dec 31 Capital Account Dec 31 Rental Income 3,600
- (Profit for Year) 60,600 Dec 31 Disposal Profit 750
- Dec 31 Allowance Decrease 400
- ────────────────────────────────────────────────────────────────────────────────
- 163,900 163,900
- ──────────────────────────────────────────────────────────────────────────────── CAPITAL ACCOUNT
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Dec 31 Drawings (Total) 42,000 Jan 1 Balance b/d 168,400
- Dec 31 Balance c/d 197,000 Jun 30 Bank (Capital In) 10,000
- Dec 31 SPL (Net Profit) 60,600
- ────────────────────────────────────────────────────────────────────────────────
- 239,000 239,000
- ────────────────────────────────────────────────────────────────────────────────
- 20X6
- Jan 1 Balance b/d 197,000
- 8. Common Exam Pitfalls & Examiner Advice
Miscalibrating Carriage : Never put carriage outwards in the trading section; carriage outwards is an operating selling expense. Putting it in cost of sales distorts gross profit and will lose assessment marks.
Inventory Drawings Valuation : Never deduct stock drawings at selling price. Always credit Purchases at cost price. Crediting at selling price falsely inflates profits.
Confusing Discounts : Discounts Allowed is an expense (Dr SPL operating overhead), whereas Discounts Received is income (Cr SPL other operating income).
Finance Costs Segregation : In accordance with IAS 1, bank loan and overdraft interest must be presented below operating profit as finance costs, not buried inside general administrative expenses.