A sole proprietorship is a business that is owned, managed, and controlled by a single person. To know whether the business is making profit or loss, and to understand its financial position, the owner prepares financial statements at the end of the accounting period.
Meaning of Financial Statements
Financial statements are the final results of the accounting process. They provide a clear picture of the business performance and financial health. For a sole proprietorship, these statements mainly include:
- Trading Account
- Profit and Loss Account
- Balance Sheet
1. Trading Account
- Prepared to find out Gross Profit or Gross Loss.
- Shows direct incomes (like sales, closing stock) and direct expenses (like purchases, wages, carriage inwards).
- Formula:
Gross Profit = Net Sales – Cost of Goods Sold
2. Profit and Loss Account
- Prepared to calculate Net Profit or Net Loss.
- Shows indirect expenses (like rent, salaries, advertising, depreciation) and indirect incomes (like commission received, discount received).
- Formula:
Net Profit = Gross Profit + Other Incomes – Indirect Expenses
3. Balance Sheet
- Prepared on a particular date (usually year-end).
- Shows Assets (resources owned by the business) and Liabilities (obligations owed by the business) along with Capital (owner’s investment).
- Purpose: To show the financial position of the business.
Importance of Financial Statements for Sole Proprietorship
- Helps in knowing profit or loss of the business.
- Shows financial position (assets, liabilities, capital).
- Useful for decision-making and future planning.
- Builds trust with banks, investors, and creditors.
- Provides a record for taxation purposes.
✅ In summary:
Financial statements of a sole proprietorship include the Trading Account, Profit & Loss Account, and Balance Sheet. Together, they help the owner understand how much profit has been earned, where expenses occurred, and what the financial position of the business is.
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