Sole Traders (Cambridge (CIE) O Level Accounting)

Sole Traders

Who is a sole trader?

• A sole trader is someone who owns and controls a business on their own

• This type of business business is easier to set up than other types of businesses as there are no legal requirements

• The sole trader may employ others to help them in running the business but the sole trader is the only owner of the business

What are the advantages of operating as a sole trader?

• The sole trader gets to keep all the profits that the business makes

• It is quite easy for the sole trader to make decisions as they do not need to consult with anyone else

• The financial statements prepared by the sole trader are kept private and do not need to be shared with the public

• Book-keeping and accounting functions are much easier to perform

What are the disadvantages of operating as a sole trader?

• The sole trader has to bear all the responsibility for any losses made by the business

• As the sole trader is the only owner, there is no one else to share the workload or decisions of the business with

• There are limits to the amount of capital the sole trader can invest in the business as they have no one else to contribute to funding the business

• If the owner is on holiday or becomes sick,  they may not make any money and the business may suffer

• The owner has unlimited liability

  • This means the owner’s personal possessions may be used to pay debt if the business becomes bankrupt as the owner and the business are one entity

How are the profits of the business calculated?

• The profits of the business are calculated when the financial statements of the business are prepared

• There are two financial statements prepared by sole traders

  • The income statement

  • The statement of financial position

• Financial statements are usually prepared from a list of balances or a trial balance

  • Items listed in the trial balance are used once when preparing the financial statements

  • Additional notes or information found below the trial balance are used twice when preparing the financial statements

Trading & Service Businesses

What is a trading business?

• A trading business buys or sell goods

  • Examples include grocery stores, car dealerships, etc

What is a service business?

• A service business provides a service

• The business does not buy or sell goods

  • Examples include insurance company, accountants, travel agents, hairdresser etc