Sole traders

• A sole trader owns and runs the business alone: full control and all the profit, but unlimited liability.
• The income statement measures profit for a period; the statement of financial position lists assets, liabilities and capital on a specified date.
• A trading business buys and sells goods, so its income statement has a cost of sales section; a service business earns fees and has none.
• Year-end adjustments: depreciation (three methods), accruals and prepayments of expenses and income, irrecoverable debts and the provision for doubtful debts, and goods taken for own use.

One owner, all the profit, all the risk

Profit over a period; position on a date

The income statement shows the profit or loss for the year, so the owner can judge performance, decide on drawings and compare with earlier years. The statement of financial position shows the assets, liabilities and capital on one specified date (the last day of the year), so the owner can see what the business is worth, whether it can pay its debts and how it is financed. Both are needed by banks and tax authorities.

A trading business buys goods and sells them at a profit (a shop, a wholesaler). Its income statement first calculates gross profit (revenue − cost of sales), then deducts expenses. A service business (a hairdresser, an accountant, a driving school) sells services, so it has no cost of sales and no gross profit: fees earned less expenses gives profit for the year.

Worked example: service business

Karim runs a driving school. For the year ended 31 December 2025: fees received $64,300, rent $8,400, wages $21,600, motor expenses $3,900, general expenses $2,150, depreciation of vehicles $2,500. Prepare his income statement.

Revenue → gross profit → profit for the year

Carriage inwards carriage outwards

Goods taken by the owner for own use are recorded at cost: Dr Drawings, Cr Purchases. They reduce purchases (and so cost of sales) and increase drawings. They are not sales.