Final Accounts of a Sole

When a sole trader finishes their business year, they must show what they owe to others and what belongs to the owner. Liabilities are debts the business owes to creditors—people or companies who supplied goods on credit. Current liabilities are debts due within twelve months, like money owed to suppliers or bank overdrafts.

Consider a Lagos trader who bought goods worth ₦500,000 on credit from wholesalers. This amount is a current liability because it must be paid within a year. Proprietor's capital is different—it's the owner's net investment in the business, calculated as total assets minus total liabilities. If the trader's assets total ₦2,000,000 and liabilities are ₦500,000, the capital is ₦1,500,000.

In final accounts, liabilities appear on the balance sheet showing what the business owes, while capital shows the owner's equity. Understanding this separation is crucial for proper accounting.

When preparing final accounts for a sole trader, you must adjust certain expenses and income items to show the true financial position. These adjustments reflect amounts owed but not yet paid, or amounts received but not yet earned.

Common adjustable items include outstanding expenses (like electricity bills awaiting payment), prepaid expenses (rent paid in advance), accrued income (money earned but not received), and income received in advance. For example, if a Nigerian trader pays ₦50,000 for three months' shop rent in November but the accounting year ends in December, only one month's rent (₦16,667) counts as December's expense; the remaining ₦33,333 becomes prepaid rent in the balance sheet.

These adjustments ensure your profit and loss account shows only expenses and income for the period covered, making financial statements accurate and comparable across years.

The statement of profit or loss shows all money coming into a business during a period. This income includes sales revenue (money from selling goods or services) and other income like rent received or commission earned. For example, if Bola runs a provision store in Lagos and sells goods worth ₦500,000 in January, this ₦500,000 is his sales revenue and appears at the top of his profit or loss statement.

Income is different from profit because profit only comes after you subtract all your expenses from income. So if Bola's expenses were ₦300,000, his profit would be ₦200,000, not the full ₦500,000. The income figure always appears first in the statement because everything else depends on it.

Bad debts occur when a customer completely fails to pay money owed to your business, and you're certain they won't pay. You then write off this amount as a loss in your accounts. For example, if Adekunle's supermarket sold goods worth ₦50,000 on credit to a customer who later became bankrupt, that ₦50,000 becomes a bad debt once Adekunle confirms it's uncollectable.

Provision for bad debts is different. It's money you set aside as a safety cushion because you suspect some customers might not pay, even though you're not yet sure which ones. It's like saving for trouble you expect but haven't confirmed. So if Adekunle knows some debtors look shaky but hasn't written them off yet, he creates a provision—say 5% of total debtors.

In your accounts, bad debts reduce profit immediately, while provision is an allowance that adjusts year to year based on your estimate of likely losses.

When a business sells goods on credit, not every customer pays back their money. Some debts become doubtful, meaning there's uncertainty about whether the customer will ever pay. A provision for doubtful debts is money the business sets aside to cover these losses before they actually happen. For example, if Ade's Supermarket in Lagos sells N500,000 worth of goods on credit and suspects that 5% might never be paid, they create a provision of N25,000 in their final accounts. This appears as a deduction from receivables on the balance sheet. Creating this provision is important because it shows a true picture of what the business actually owns, following the prudence concept in accounting. Without it, the business would appear more profitable and have more assets than reality suggests.