Final Accounts of Sole Proprietors

Sole proprietors are traders who run the business alone without engaging in any partnership, he/she gets the entire profit as well as are solely liable for losses suffered by such a business. Final accounts of sole proprietors help the sole owner to understand profits and losses incurred by the business. Final accounts meaning, as the name suggests, is the last step of accounting in a business. The final account’s meaning and process incorporate three major elements-trading accounts, the profit loss account, and the balance sheet account. However, at times final accounts with adjustments are made to provide accurate profitability measures to the owner, by overcoming errors. 

Elements of Final Accounts of a Sole Proprietorship

After all the transactions regarding the business are recorded in a journal, it is then transferred to a ledger. At year-end, the ledger balances are transferred to the trial balance. This is the step before building the final accounts. 

The final accounts involve several elements: –

1. Trading account- It derives the gross profit of the business. To develop a trading account, the purchase and sale of goods are considered along with the direct expenses. The equation of gross profit stands as, Gross profit = Net sales – Cost of sold goods. 
2. Profit and loss account- All losses, gains, incomes, and expenses are considered to arrive at the net profit of the business. The equation of net profit stands as, Net profit = Gross profit + Other Income – Expenses.
3. Balance sheet- It is made to identify the assets (properties and related resources of the business) and liabilities of an enterprise. Capital invested by a sole proprietor in his/her own business is also seen as the liability of the business along with liability towards other creditors, investors, etc. It is important that the totals of the balance sheet match. The equation stands as Assets = Liabilities + Capital.

The trading account combined with the profit and loss account constitutes the income statement of the business. The statement shows the incomes and expenditures of the business. While the trading, as well as the profit and loss account, helps one to understand the performance of the business, the balance sheet establishes the position of such a business.  

Final Accounts with Adjustments

Final accounts with adjustments incorporate the changes in entries before it becomes final. Without incorporating these entries, the balance sheet would not yield the correct measures of profits and losses. Adjustment of closing stock is a part of this. Closing stock refers to the inventory of the firm. It is important to analyze and record the cost of goods unsold. This process involves physical verification of such stocks, which is quite a time-taking process and thus cannot be involved in the trial balance. Hence, this adjustment needs to be incorporated into the process of final accounts.

Moreover, adjustment of outstanding expenses also needs to be incorporated into final accounts. The outstanding expenses refer to the costs of business incurred in a certain period that needs to be paid soon. The costs of this period should be added to the balance sheet to present a more accurate picture through accounting.  

Other than these, depreciation, outstanding income (have been earned but not received within the period of accounting) and expenses paid in advance for the upcoming year are also to be incorporated through adjustments in the final accounts of a sole proprietorship. 

Presentation Methods of Final Accounts of a Sole Proprietorship

1. Horizontal form: This format of financial statement uses additional columns, a T-shaped form. Assets are mentioned in the right column while liabilities are shown in the left column. The horizontal form includes account data for the current year only. 
2. Vertical form- The information is spread from the top to the bottom of the sheet. The information is provided in such a manner that the sheet can incorporate the account data of the previous year as well. This provides the strategic advantage of comparing the current year’s accounts with the previous year’s one. 

Conclusion

Final accounts of sole proprietorship have been dealt with understanding final accounts meaning and use. Moreover, the essential elements or steps that combine to form the stage of the final accounts have been explained. It has also included the most important equations required while creating the final accounts of a sole proprietorship. Also, final accounts with adjustments have been elaborated explaining the various scopes available for adjustment in the final accounts. The methods of presentation of final accounts have been included, too. The FAQs on the topic answer the most common doubts that might arise after the reading.