This chapter walks through the full preparation of a statement of profit or loss and a statement of financial position for both sole proprietorships and limited liability companies. It includes common year-end adjustments for accruals, depreciation, and doubtful debts.

Learning objective

By the end of this chapter, you should be able to:

• Calculate revenue, cost of sales, gross profit, and operating profit
• Prepare a statement of profit or loss or extracts as applicable.
• Prepare a statement of financial position or extracts as applicable.

Illustration: Kwame Mensah enterprise

Kwame Mensah operates a grocery business. The following trial balance was extracted from his books as at 31st December 2024:

	$	$
Capital (1st January 2024)		85,000.00
Drawings	24,000.00
Property (at cost)	120,000.00
Motor Vehicles (at cost)	45,000.00
Furniture and Fittings (at cost)	18,000.00
Accumulated Depreciation: Property		24,000.00
Accumulated Depreciation: Motor Vehicles		18,000.00
Accumulated Depreciation: Furniture		7,200.00
Inventory (1st January 2024)	32,500.00
Account Receivables	28,400.00
Account Payables		81,000.00
Cash at Bank	18,400.00
Sales Revenue		285,000.00
Sales Returns	4,200.00
Purchases	165,000.00
Purchase Returns		3,500.00
Carriage Inwards	2,800.00
Salaries and Wages	38,500.00
Rent and Rates	18,000.00
Insurance	6,400.00
Electricity	5,200.00
Advertising	4,800.00
Motor Vehicle Expenses	7,500.00
General Expenses	3,200.00
Bank Charges	1,800.00
Long-term Loan		40,000.00
Total	543,700	543,700

ADDITIONAL INFORMATION:

• Closing Inventory as at 31st December 2024 was valued at $ 38,600.
• Depreciation is to be provided at the following rates per annum on cost: Property 2%, Motor Vehicles 20%, and Furniture and Fittings 10%.
• Accrued expenses at the year-end were salaries $ 2,500 and Electricity $ 800.
• An amount of $ 1,400 was deemed as bad debts. A provision for doubtful debts of 5% on the remaining accounts receivable is required.

REQUIRED:

a) Prepare a Statement of Profit or Loss for the year ended 31st December 2024

b) Prepare a Statement of Financial Position as at 31st December 2024

Suggest solution

Work along as you read. Focus on why each adjustment is made, not just the arithmetic. The goal is to understand the logic behind the figures that appear in each statement.

We’ll use this question to show how to prepare:

• a statement of profit or loss, and
• a statement of financial position

for both a sole proprietorship and a limited liability company.

The underlying calculations are the same. What changes is mainly the presentation (especially under IFRS requirements).

Step 1: Calculate the net sales

Step 2: Calculate the cost of sales

Step 3: Accruals adjustments and depreciation computations

Year-end adjustments make sure income and expenses are recorded in the correct accounting period. In this question, we need to adjust for:

• accrued expenses (salaries and electricity)
• bad debts and the allowance (provision) for doubtful debts
• depreciation

These adjustments affect the operating expenses in the statement of profit or loss, and they also create or update balances in the statement of financial position.

Hint: Use the additional information to identify every item that needs an adjustment, then compute the adjusted figures before you prepare the statements.

Step 4: Calculate the operating expenses

Finance costs and income tax expense are not included in this question. So, profit for the year is calculated after operating expenses.

Prepare the statement of profit or loss

In a sole proprietorship, it’s common to show the detailed components (net sales, cost of sales, and operating expenses) directly on the face of the statement. The step-by-step workings above are there to show how each figure is built up; once you understand them, you can present the final figures directly in the statement.

Kwame Mensah Enterprise

Statement of profit or loss for the year ended 31st December 2024
Sales revenue	285,000
Sale returns	(4,200)
Net sales		280,800
Less Cost of Sales:
Opening inventory	32,500
Purchases	165,000
Purchase returns	(3,500)
Carriage inwards	2,800
Cost of goods available for sale	196,800
Closing inventory	(38,600)
Cost of sales		(158,200)
Gross Profit		122,600
Less Operating Expenses:
Salaries and Wages ($38,500+$2,500)	(41,000)
Rent and Rates	(18,000)
Insurance	(6,400)
Electricity expenses ($5,600+$800)	(6,000)
Advertising	(4,800)
Motor Vehicle Expenses	(7,500)
General Expenses	(3,200)
Bank Charges	(1,800)
Bad debts	(1,400)
Provision for doubtful debts	(1,350)
Depreciation: Property (2%*120,000)	(2,400)
Motor vehicles (20%*45,000)	(9,000)
Furniture and Fittings (10%*18,000)	(1,800)
Total operating expenses		(104,650)
Profit for the year		17,950

Statement of financial position

This is presented below.

Statement of financial position as at 31st December 2024

Statement of financial position as at 31st December 2024
	Cost ($)	Accumulated depreciation ($)	Net book value ($)
Non-current asset
Property	120,000	(26,400)	93,600
Motor vehicles	45,000	(27,000)	18,000
Furniture and fittings	18,000	(9,000)	9,000
Total non-current assets			120,600
Current asset:
Inventory			38,600
Account receivables ($28,400 - $1,400)	27,000
Provision for doubtful debts	(1,350)		25,650
Cash at bank			18,400
Total current assets			82,650
Total asset			203,250
Financed by:
Capital			85,000
Net profit			17,950
Drawings			(24,000)
Total equity			78,950
Long-term liabilities:
Long-term loan			40,000
Current liabilities:
Account payable			81,000
Accrued expenses: Wages and Salaries			2,500
Accrued expense: Electricity			800
Total current liabilities			84,300
Total equity and liabilities			203,250

IFRS 18: Presentation requirement

If the entity were a limited liability company, it would present the statements in line with IFRS 18. In that case:

• detailed calculations are typically shown in the notes (workings), and
• the face of the financial statements shows summarised totals.

These would appear as:

Statement of profit or loss for the year ended 31st December 2024

	Note	$
Sales	1	280,800
Cost of sales	2	(158,200)
Gross profit		122,600
Administrative expenses a	3	(104,650)
Operating profit		17,950

^a All the operating expenses are administrative in nature, so they are classified as administrative expenses. There is no finance cost and no income tax expense in this question, so the operating profit is the same as the profit for the year.

Statement of financial position as at 31st December 2024

	Notes	$
Non-current asset
Property, plant and equipment (PPE)	5	120,600
Current asset:
Inventory		38,600
Account receivables	6	25,650
Cash at bank		18,400
Total asset		203,250
Financed by:
Ordinary share capital*		85,000
Retained earnings ($17,950 - $24,000)*		(6,050)
Total equity		78,950
Non-current liabilities:
Long-term loan		40,000
Current liabilities:
Account payable		81,000
Accrued expenses	7	3,300
Total equity and liabilities		203,250

• Capital and drawings apply to a sole proprietorship. In a company, the equivalents are ordinary share capital and dividends (or other distributions). Profit (or loss) for the year accumulates in retained earnings.

5. Property, plant and equipment schedule

	Property ($)	Motor vehicle ($)	Furniture and fittings ($)	Totals ($)
Cost	120,000	45,000	18,000	183,000
Accumulated depreciation (1/1/2024)	(24,000)	(18,000)	(7,200)	(49,200)
Carrying amount (1/1/2024)	96,000	27,000	10,800	133,800
Depreciation charge for the year	(2,400)	(9,000)	(1,800)	(13,200)
Carrying amount (31/12/2024)	93,600	18,000	9,000	120,600

6. Account receivables

	$
Per trial balance	28,400
Bad debts	(1,400)
Provision for doubtful debt	(1,350)
	25,650

7. Accrued expenses

	$
Accrued salaries	2,500
Accrued electricity expenses	800
	3,300

Review the workings and the final statements together. Each adjustment should appear in profit or loss and, where relevant, also update a related asset or liability in the statement of financial position.