Adjust sole-trader statements for year-end items and drawings
Carry depreciation, accruals, debts and inventory adjustments into the financial statements, and keep drawings outside business expenses.
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
The owner takes inventory for personal use. Which account is normally debited?
What you will learn
- Apply year-end adjustments when preparing sole-trader statements
- Record drawings of cash, goods and other assets
- Remove the owner's private expenses from business profit
Carry adjustments into both statements
Depreciation and irrecoverable-debt expenses reduce profit; an allowance changes expense by the difference from the existing balance. Accruals and prepayments adjust the period expense and create a liability or asset.
Closing inventory enters the cost-of-sales calculation and appears as a current asset. A correct statement must use the same adjusted balances in profit and financial position; do not adjust only one side.
Drawings are not business expenses
Cash or other assets taken by the owner are drawings: debit Drawings and credit Bank or the asset account. Goods taken for personal use are credited to Purchases or Inventory and debited to Drawings at cost.
If the business pays a private expense, debit Drawings and credit the relevant expense or Bank as required to remove it from business expenses. Drawings reduce closing capital; they do not reduce profit for the year.
Pause and explain
A business paid the owner's $300 personal electricity bill and charged it to business expenses. What correction is needed?
Worked example
Reported profit before adjustments is $22,000. The business included the owner's $600 personal phone bill in telephone expense, the owner took goods costing $450 and withdrew $2,000 cash. Calculate corrected profit and drawings.
Show the worked solution
- Remove the private bill from business expense: profit rises by $600.
- Goods taken for personal use reduce purchases by $450, so profit rises by $450; record Dr Drawings, Cr Purchases.
- Corrected profit = $22,000 + 600 + 450 = $23,050. Drawings total = 600 + 450 + 2,000 = $3,050; cash withdrawal does not affect profit.
Answer Corrected profit is $23,050. Drawings are $3,050, including the private bill, goods and cash withdrawal; drawings reduce capital, not profit.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Profit before final adjustments is $18,000. Add an unpaid wages accrual $500, remove a prepayment $180 from rent expense, charge depreciation $1,200, and write down inventory by $300. Calculate adjusted profit.
Give me a hint
Add the accrual to expense, subtract the prepaid part, then deduct depreciation and the inventory write-down effect.
Compare my reasoning
- Adjusted wages expense reduces profit by $500; the rent prepayment increases profit by $180.
- Depreciation reduces profit by $1,200; the inventory write-down reduces profit by $300.
- Adjusted profit = 18,000 − 500 + 180 − 1,200 − 300 = $16,180.
Adjusted profit is $16,180. The related position balances include accrued wages $500, prepaid rent $180 and inventory reduced by $300.
Look for these in your work
- Adjustment directions correct
- Calculation correct
- Position balances identified
The owner takes goods costing $700, withdraws $1,400 cash and uses a company-paid $250 private phone bill. State the entries and total drawings.
Give me a hint
Record each private withdrawal in Drawings and remove the private bill from business expense.
Compare my reasoning
- Goods: Dr Drawings $700; Cr Purchases $700.
- Cash: Dr Drawings $1,400; Cr Bank $1,400. Private phone: Dr Drawings $250; Cr Telephone expense $250.
- Total drawings = 700 + 1,400 + 250 = $2,350; the phone correction increases reported profit by $250.
Total drawings are $2,350. Record goods, cash and private phone in Drawings; remove the private phone cost from business expense. Drawings reduce capital, not profit.
Look for these in your work
- Entries correctly classified
- Total correct
- Profit and capital effects distinguished
A sole trader's closing receivables before adjustment are $8,000. Write off $300 and maintain a 4% allowance on the remaining balance; the existing allowance is $200. Find net receivables and the expense adjustment.
Give me a hint
Write off the confirmed debt first, then compare the required allowance with the existing balance.
Compare my reasoning
- Receivables after write-off = 8,000 − 300 = $7,700.
- Required allowance = 4% × 7,700 = $308; increase over $200 is $108.
- Net receivables = 7,700 − 308 = $7,392. Current-period irrecoverable-debt expense is the $300 write-off plus the $108 allowance increase.
Net receivables are $7,392. Recognise a $300 write-off and increase the allowance by $108; total expense adjustment is $408.
Look for these in your work
- Write-off first
- Allowance change correct
- Net presentation and expense correct
Common mistakes
- Including drawings as an expense
- Leaving private costs in business expenses
- Crediting sales for goods taken by the owner
- Applying an allowance percentage before write-offs
What can you explain now?
Does a cash drawing reduce profit for the year?
Compare with the explanation
No; it reduces the owner's capital
Drawings are a withdrawal by the owner, not a business expense.
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Make it stick
Why are drawings kept separate from business expenses and profit?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.