Sole Traders (Cambridge International IGCSE 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 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

Exam Hint The advantages and disadvantages may be presented as a multiple choice question on Paper 1. A Paper 2 question may require you to discuss if a sole trader should set up as a limited company or a partnership. Knowledge of the advantages and the disadvantages can be used to present your argument in support or against the decision to be made.

Worked Example Which of the following is not an advantage of operating as a sole trader?

A	Decisions can be made quickly by the sole trader as there is no need to consult with anyone else
B	The sole trader does not have to share any of the profit made
C	The financial statements of a sole trader are published to the public
D	Book-keeping and accounting of the records of a sole trader are simpler

Answer:

Final answer: The correct answer is C. The financial statements of a sole trader do not need to be published to the public. They can be kept private.

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