Final Accounts Preparation Flashcards

The statement of profit or loss for a sole trader begins with:

Answer: Revenue (sales)

The income statement (profit or loss) starts with Revenue (sales/turnover) at the top, then deducts cost of sales to arrive at gross profit, before deducting expenses to reach net profit.

Gross profit is calculated as:

Answer: Revenue minus cost of sales

Gross profit = Revenue − Cost of Sales. Cost of sales includes opening inventory plus purchases minus closing inventory (and any returns or carriage inwards).

In a partnership, the appropriation account shows:

Answer: How the net profit is divided between the partners

The appropriation account follows the income statement for a partnership; it distributes the net profit between partners by showing interest on capital, salaries (if agreed), and the profit share.

Partners' current accounts record:

Answer: The day-to-day transactions — drawings, salary, interest on capital, and profit share

Partners' current accounts track the fluctuating element of each partner's stake: credits for salary allowance, interest on capital, and profit share; debits for drawings and interest on drawings.

For a limited company, dividends are shown in the financial statements as:

Answer: A deduction from retained earnings in the statement of changes in equity

Dividends paid are distributions of profit to shareholders; they are shown as a deduction from retained earnings in the statement of changes in equity, not as an expense in the income statement.

The balance sheet (statement of financial position) of a sole trader includes which of the following components of equity?

Answer: Capital introduced, retained profit, and drawings

For a sole trader, equity comprises opening capital plus capital introduced plus net profit for the period, minus drawings. There is no share capital — the owner's equity is shown as capital.