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Preparation of Balance Sheet of Sole Trading Concerns

A Balance Sheet is a financial statement that shows the financial position of a business at a specific point in time. For a Sole Trading Concern, the balance sheet lists the assets, liabilities, and capital of the business, providing a snapshot of the business's overall financial health. It is typically prepared at the end of an accounting period (monthly, quarterly, or annually).

2. Format of a Balance Sheet

The Balance Sheet follows the accounting equation: [ \text{Assets} = \text{Liabilities} + \text{Owner’s Equity (Capital)} ] This equation ensures that the balance sheet "balances" — total assets must always equal the total liabilities and owner’s equity.

The Balance Sheet is generally prepared in a T-format or a vertical format, with the left side listing Liabilities and Capital and the right side listing Assets.

3. Structure of a Balance Sheet for Sole Trading Concerns

Liabilities and Capital (Left Side)

This section shows the obligations and the owner's investment in the business.

1. Capital:

  • Represents the amount invested by the owner in the business, adjusted for Net Profit or Net Loss (from the Profit & Loss Account) and any Drawings (money taken by the owner for personal use).
  • Capital Formula: [ \text{Capital} = \text{Opening Capital} + \text{Net Profit} - \text{Drawings} ]
  • If there is a loss, it will reduce the capital.

2. Liabilities:

  • Current Liabilities: Obligations that must be paid within a short period, usually within one year. Examples include:
    • Creditors: Amounts owed to suppliers for goods purchased on credit.
    • Bank Overdraft: A negative balance in a bank account.
    • Outstanding Expenses: Expenses that have been incurred but not yet paid (e.g., unpaid wages, rent).
  • Long-Term Liabilities: Debts that are payable over a longer period, such as:
    • Loans: Long-term loans taken from banks or financial institutions.

Assets (Right Side)

This section shows what the business owns and how its resources are deployed.

1. Fixed Assets:

  • Assets that are purchased for long-term use in the business and are not intended for resale. Examples include:
    • Land and Buildings: Property owned by the business.
    • Plant and Machinery: Equipment used in the production process.
    • Furniture and Fixtures: Items like office desks, chairs, etc.
    • Vehicles: Delivery trucks, company cars, etc.

2. Current Assets:

  • Assets that are expected to be converted into cash within a short period, typically within one year. Examples include:
    • Cash in Hand: Physical cash available with the business.
    • Cash at Bank: The balance in the business’s bank account.
    • Debtors: Customers who owe money to the business for goods or services sold on credit.
    • Stock (Inventory): Goods available for sale at the end of the period.
    • Prepaid Expenses: Expenses that have been paid in advance (e.g., prepaid rent or insurance).

5. Example of a Balance Sheet for Sole Trading Concern

Here is a sample Balance Sheet for a sole trading concern at the end of the accounting period:

balance sheet

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