Cambrige Notes: Sole Trader: Trading and Profit and Loss Account and Capital Accounts

• The Trading and Profit and Loss Account is not balanced off at the end of the trading period
• This means there are in no corresponding “balance b/d” in the books
• Instead the Net Profit increases the capital of the owner
• This is done by crediting the Capital Account of the owner and
• Debiting the Profit and Loss Account with the corresponding entry
• Every sale that results in profit in fact results in the increase of the business owner’s (proprietor’s) capital
• Conversely any loss made on each sale results in a decrease in the proprietor’s capital
• Any other revenues made lead to the increase of the proprietor’s capital
• Instead of making an adjustment in every case when this happens all these transactions are brought together into different named accounts for example Sales, Purchases and Rent received and rent paid accounts
• There are then aggregated in a financial statement called the Trading and Profit and Loss Account
• The effect is then computed and transferred to the Capital Accounts
• A net loss results in a decrease in Capital which means the Capital Account is debited with the amount of the loss

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.