Sole traders and drawings Cambridge IGCSE Accounting revision
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In plain words
A sole trader is the simplest kind of business: one person owns it, runs it and takes the profit. The accounts must still treat the business and its owner as two separate things.
6 things to know
- A sole trader is a business owned and controlled by one person.
- Advantages: it is easy and cheap to set up, the owner makes all the decisions and keeps all the profit, and the business's affairs stay private.
- Disadvantages: the owner has unlimited liability, so personal possessions can be taken to pay the business's debts. Capital is limited to what one person can provide. The owner carries all the responsibility, and the business may stop if the owner is ill.
- A trading business buys and sells goods. A service business sells a service, so it has no inventory and no gross profit. A manufacturing business makes the goods it sells.
- Drawings are anything the owner takes out of the business for personal use: money, goods or other assets. Private expenses paid by the business are drawings too.
- Goods taken by the owner are valued at cost: debit drawings, credit purchases. Drawings are not an expense. They reduce the owner's capital.
Worked example
During the year an owner took goods costing $300 for her own use. The telephone expense of $940 includes $80 for her private calls. State the entries and the effect on profit.
- Goods taken: debit drawings $300, credit purchases $300.
- Private calls: debit drawings $80, credit telephone $80.
- Purchases and telephone are both lower, so profit is $380 higher than it would have been. Drawings are $380 higher.
Tips and tricks
- Drawings never appear in the statement of profit or loss. They are deducted from capital in the statement of financial position.
- Unlimited liability means the owner is personally responsible for all the debts of the business. It does not mean the business has unlimited debts.
It lands in your notebook with its questions as flashcards.
Sole traders and drawings: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What is a sole trader?
One owner, who takes the decisions and the profit.
Which is a disadvantage of being a sole trader?
Personal possessions are at risk if the business cannot pay its debts.
How are goods taken by the owner for personal use recorded?
They are taken out of purchases at cost.
Where do drawings appear in the financial statements?
They reduce what the business owes the owner.
Which of these businesses would have no gross profit?
A service business has no goods to sell, so no cost of sales.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 6 marks. Write your answers on paper, then check them.
Sole traders and drawings
Cambridge IGCSE Accounting 0452 · 6 marks · papermunch.org
Name ______________________________ Date ______________
State two advantages of operating as a sole trader.[2]
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The owner makes all the decisions. The owner keeps all the profit. (Also: it is easy and cheap to set up.)
Explain what is meant by unlimited liability.[2]
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The owner is personally responsible for all the debts of the business, so personal possessions may have to be sold to pay them.
An owner takes goods costing $150 for personal use. State the double entry.[2]
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Debit drawings $150. Credit purchases $150.
Answers: Sole traders and drawings
- 1. The owner makes all the decisions. The owner keeps all the profit. (Also: it is easy and cheap to set up.)
- 2. The owner is personally responsible for all the debts of the business, so personal possessions may have to be sold to pay them.
- 3. Debit drawings $150. Credit purchases $150.