5.1 Sole Traders

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Sole Traders: Advantages and Disadvantages

Definition: A business owned and operated by one individual.

Advantages:

  1. Full Control: Sole traders have complete control over their business decisions.

  2. Simple to Set Up: There are fewer legal formalities and lower startup costs.

  3. Profits Retained: All profits go directly to the owner.

Disadvantages:

  1. Unlimited Liability: The owner is personally liable for all business debts.

  2. Limited Capital: Raising funds can be difficult as it's dependent on personal finances.

  3. Heavy Workload: The owner may face long hours and manage all aspects of the business alone.

Importance of Preparing Statements of Profit or Loss and Statements of Financial Position

Statements of Profit or Loss: (Income Statement)

  • Purpose: Shows the business's financial performance over a specific period.

  • Importance: Helps in assessing profitability, cost control, and revenue generation.

Statement of Financial Position:

  • Purpose: Displays the assets, liabilities, and equity of a business at a specific date.

  • Importance: Provides insight into financial health, liquidity, and capital structure.


Trading vs. Service Businesses

Trading Business:

Service Business:

  • Definition: Engages in buying and selling goods.

  • Example: Retail stores

  • Statements of Profit or Loss (Income Statement): Includes sales revenue, cost of sales, and gross profit.

  • Definition: Provides intangible products or services.

  • Example: Schools / Consulting firms.

  • Statements of Profit or Loss (Income Statement): Includes service revenue and operating expenses.

Preparing Statements of Profit or Loss (Income Statement) for Trading Business:

Preparing Statements of Profit or Loss (Income Statement) for Service Business:

  1. Sales Revenue: Total income from sales.

  2. Cost of Sale (COS): Opening inventory + Purchases - Closing inventory.

  3. Gross Profit: Sales Revenue - COS.

  4. Profit for the year: Gross Profit - Operating Expenses.

  1. Service Revenue: Total income from services provided.

  2. Operating Expenses: Costs incurred to provide services.

  3. Profit for the year: Service Revenue - Operating Expenses.






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    Complete Notes, Topical Exam Questions and Quizzes                  for IGCSE Accounting  1 The fundamentals of accounting 1.1 The purpose of accounting 1.2 The accounting equation   2 Sources and recording of data 2.1 The double entry system of book-keeping 2.2 Business documents 2.3 Books of prime entry   3 Verification of accounting records 3.1 The trial balance 3.2 Correction of errors 3.3 Bank reconciliation 3.4 Control accounts   4 Accounting procedures 4.1 Capital and revenue expenditure and receipts 4.2 Accounting for depreciation and disposal of non-current assets 4.3 Other payables and other receivables 4.4 Irrecoverable debts and provision for doubtful debts 4.5 Valuation of inventory   5 Preparation of financial statements 5.1 Sole traders 5.2 Partnerships 5.3 Limited companies 5.4 Clubs and societies 5.5 Manufacturing accounts 5.6 Incomplete records   6 Analysis and interpretation ...
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