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Term 1 Topic 5Financial accounting of a sole trader
Overview
Topic 5 Page 35 Financial accounting of a sole trader
1 Page 35 Definition and explanation of accounting concepts
2 Page 42 Bookkeeping of a sole trader
1 Journals
2 Ledgers
3 Trial balance
4 Financial statements
3 Page 113 Accounting equation
Overview – Financial accounting of a sole trader
1 Definition and explanation of accounting concepts
1.1 Forms of ownership
When an individual decides to open a business, he/she has to consider the capital
available and the capital needed to choose the form of ownership of the business. Other
factors such as the control over the business as well as liability of the owner and
continuity of the business also need to be considered. Some forms of ownership
include:
Sole proprietor (trader) – this is a one man business which means that the owner
has full control over the business. One person cannot contribute a lot of capital on
their own. The profit made goes to the owner.
Partnership – 2 to 20 partners can start a partnership which means that all partners
who are involved have a say in the business. The business can have more capital
because more partners can put their money together to start a partnership. Profit is
shared amongst the partners.
Companies – People who are the owners of a company buy a part of the company.
This is commonly known as buying shares. Many shareholders make up the owners
of a company. A company can therefore have a lot more capital because so many
people can contribute. Profit is known as dividends and shared amongst the
shareholders.
In grade 10 we are going to concentrate on a sole proprietor. One person brings in all the
money and share all the profits or losses.
Via Afrika Publishers » Accounting Grade 10 36
, Term 1 Topic 5
Financial accounting of a sole trader
A person who wants to start a sole proprietor has to choose between a business that
renders a service or a business that sells goods. It all depends on what the main source
of income is. In a service business, the main source of income is fee income or
commission income (for example, doctors, plumbers, garden services, etc.)
A retailing business buys finished products (products that are manufactured and ready
to be sold), adds a profit and sells it to make a profit (for example, a grocery store,
clothing business, etc.)
1.2 Accounting concepts
In 3, we stipulated that accounting has certain rules to follow. In accounting there are
three broad concepts, assets, owners’ equity and liabilities. Before we discuss these
concepts, you have to have clarity on the concepts accounting period, current financial
year, short-term and long-term.
The accounting (financial) period is a period of twelve months. The period does not
have to coincide with a calendar year, but it may. An accounting period can be from the
1 July one year and ends on the 30June the following year. The government financial
year starts on the 1 March and ends on 28 February. A lot of businesses use this period
for tax purposes.
To explain the concepts current financial year, short-term and long-term, we use the
following example. Suppose that the accounting period of a business is from 1 January
2011 to 31 December 2011.
The current financial year = 1 January 2011 to 31 December 2011.
Short-term = 1 January 2012 to 31 December 2012. (within a financial year of 12
months)
Long-term = 1 January 2013 onwards. (longer than a financial year of 12 months)
The concepts Assets, Liabilities and Owners’ equity:
Via Afrika Publishers » Accounting Grade 10 37
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