The Final Accounts of a Sole Trader/proprietorship

The Trading Account shows how much profit or loss a business made from buying and selling goods. Think of it like this: a provision seller in Lagos buys rice for ₦50,000, sells it for ₦75,000, and makes ₦25,000 gross profit. This account calculates exactly that by taking sales revenue and subtracting the cost of goods sold.

The Profit and Loss Account (or Income Statement) then takes that gross profit and subtracts all operating expenses like rent, electricity, salaries, and transport. Using our provision seller example, if operating expenses total ₦8,000, the net profit becomes ₦17,000.

Together, these two statements show the complete financial performance of a sole trader's business during a period.

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The balance sheet, also called a statement of financial position, is a financial statement that shows what a business owns and owes at a specific date. Think of it as a snapshot of your business's financial health on one particular day, say December 31st.

The balance sheet follows a simple rule: Assets (what the business owns) must equal Liabilities (what it owes) plus Capital (the owner's investment). For example, if Ade's pepper soup restaurant has equipment worth ₦500,000, cash of ₦200,000, and owes suppliers ₦150,000, then his capital would be ₦550,000. The equation works: ₦700,000 assets equals ₦150,000 liabilities plus ₦550,000 capital.

Assets include current assets like cash and stock, while liabilities include short-term debts. Capital represents the owner's stake in the business.

When preparing final accounts, accountants don't just use figures from the books as they are. Adjustments are changes made to ensure accounts show the true financial position of the business. Think of it like this: if Chisom's provision store in Lagos records N50,000 sales but hasn't paid the shop assistant's salary yet, that salary must be added as an expense even though cash hasn't left yet.

Common adjustments include accrued expenses (amounts owed but not yet paid), prepaid expenses (money paid in advance), depreciation (reduction in asset value), and closing stock. These adjustments follow the matching concept, ensuring income and expenses belong to the same period.

Without adjustments, your profit figure would be completely misleading. The profit and loss account would show incorrect results, and the balance sheet wouldn't reflect what the business actually owns or owes.