Introduction to Financial Statements of a Sole Trader

Introduction:

This note will highlight and briefly discuss the various financial statements that are prepared for a business. The statements to be discussed are the statement of financial position and the income statement. These are often the financial statements of a sole trader. The financial statements for a company shall be discussed in subsequent notes.

What are Financial statements?

These are formal records of a company’s financial activities. Among others, they provide insight into the performance of a business by revealing assets, liabilities, revenues, expenditures, profits, or losses.

Statement of Financial Position:

This is also known as the balance sheet. It shows all the assets, liabilities, and capital of a company at a particular point in time. Often, the assets and liabilities are grouped into current and non-current assets and liabilities, respectively.

The balance sheet follows the fundamental accounting equation, which states that

Assets = Liabilities + Equity.

Income Statement:

This is also known as the profit and loss account, trading profit and loss account, or the statement of comprehensive income. It is prepared to determine whether a business is making profits or is making losses. Among others, it reveals a company’s revenues, expenses, and profits or loss over a period.

Conclusion:

The statements highlighted above will be discussed extensively in subsequent notes.