Financial Statements - Sole Trader vs Limited Company

Week Six Financial Statements of Sole Trader compared to Limited Company Sole Trade Business Owned and operated by a single individual. To set up: inform the Revenue Commissioners of the intention to be self-employed. A sole trader may withdraw cash and goods from the business, this is called ‘drawings’ and it reduces the capital of the business. Advantages and Disadvantages of operating a Sole Trade Business Advantages: • Any profit earned after tax is only attributable to the owner. • Quick decision-making as there is no need for consultation. • Fewer compliance issues. Disadvantages: • The owner of the business is liable for the debts of the business. • There is no one to help with decision-making. Layout of Sole Trader Accounts The Financial Statements are drawn up from the information contained in the Trial Balance. Sole Traders Name Statement of Profit or Loss for the year ended 31 December 2022 Sole Traders Name Statement of Financial Position as at year ended 31 December 2022 Limited Company Financial Statements The Statement of Profit or Loss and Other Comprehensive Income (SPLOCI). This financial statement is prepared on an accrual basis. The Statement of Financial Position (SOFP) which presents the assets, liabilities and capital at the reporting date. Statement of changes in Equity The Statement of changes in equity (SOCIE) shows the movement in each lineitem present in the equity and reserves section of the SOFP. It shows the opening and closing balance for each of the equity and reserves balances. The following are usually presented in the SOCIE: - Profit for the year - Other comprehensive income - Dividends accrued and paid - Revaluation of property and equipment - Share issues - Impact of changes in accounting policy or errors. Disclosure Notes • The company must state that the Financial Statements have been prepared in compliance with IFRS. • There are several accounting concepts but the two most important are the following: 1. The Going Concern Concept. 2. The Accrual Concept. Going Concern • • • Financial Statements are prepared on the basis that the company will continue to operate for the foreseeable future i.e., going concern basis. If the management of the company believe think that within the next 12 months, they company will either be liquidated or cease to trade – then the going concern basis cannot be applied in the preparation or presentation of the financial statements. Thus, if not a going concern, then the company would need to look at items such as; information available about the future, past profits earned or losses incurred, continuing availability of funds/potential funding and debt repayment schedules. Accrual Basis of Accounting Calculation of profit based on the accrual basis: A company is assessing its profit or loss for a given period. Sales invoice to customers €240,000 Cash received from customers €234,000 Goods and services used during the period €180,000 Payments made for these goods and services €132,000 Profit calculated on the accrual basis = Income earned – expenses incurred. = €240,000 - €180,000 = €60,000. The profit present in the Financial Statements would • be €60,000 and not based on a cash basis i.e., €234,000 - €132,000 = €102,000, which represents the net receipts for the period and not the profit. Recognise income when it is earned and not when it is received. An Accounting Standard • An accounting standard is a policy that defines the treatment of an accounting transaction in financial statements. Accounting standards provide guidance for companies to prepare and report useful financial statements in an accurate fashion. Benefits of IFRS Accounting Standards • IFRS Accounting Standards address this challenge by providing a high-quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world. • IFRS Accounting Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions. • IFRS Accounting Standards strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Our Standards provide information that is needed to hold management to account. As a source of globally comparable information, IFRS Accounting Standards are also of vital importance to regulators around the world. • And IFRS Accounting Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation. For businesses, the use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs. Conceptual Framework – Seven pillars 1. The objective of general-purpose financial reporting 2. Qualitative characteristics of useful financial information 3. Financial statements and the reporting entity 4. The elements of financial statements 5. Recognition and derecognition 6. Measurement 7. Presentation and disclosure