End-of-Period Reporting: Sole Traders, Incomplete Records, and Partnerships

Learning objectives

By the end of this chapter you should be able to:

• Prepare a statement of profit or loss and a statement of financial position from a trial balance, ensuring the figures are complete and internally consistent.
• Apply end-of-period adjustments (including inventory, accruals, prepayments, depreciation, and receivables allowances) so profit and net assets are measured for the correct period.
• Use simple incomplete-record methods (control-style equations and mark-up/margin techniques) to reconstruct missing sales, purchases, and cash flows.
• Prepare a basic partnership appropriation statement and partner current accounts to reflect an agreed profit-sharing arrangement.
• Explain how partnership changes (admission/retirement) can affect partner balances, including common approaches to recognising goodwill.

Overview & key concepts

End-of-period reporting converts ledger balances into final financial statements that explain:

• Performancefor the period (income less expenses), and
• Financial positionat the period end (assets, liabilities, and equity).

The process starts from a trial balance and then applies adjustments so that:

• income and expenses are recorded in the correct period (accrual basis), and
• assets and liabilities are not overstated or understated at the reporting date.

This chapter focuses on three common contexts:

1. Sole traders– preparing final statements from a trial balance plus year-end adjustments.
2. Incomplete records– reconstructing missing figures when bookkeeping is not complete.
3. Partnerships– allocating profit between partners using agreed appropriation terms and updating partner accounts.

A reliable check runs through everything:

Assets = Liabilities + Equity

Every adjustment must preserve this equation.

Trial balance and adjustments

The trial balance as a starting point

A trial balance is a list of closing ledger balances at a point in time. If transactions have been processed using double entry, total debits equal total credits. A balanced trial balance does not guarantee the records are error-free, but it is the usual starting point for preparing the statement of profit or loss and the statement of financial position.

A uniform way to think about adjustments

For each year-end adjustment, work through the same four steps:

• What it corrects(timing, valuation, or classification).
• Impact on statement of profit or loss(increase/decrease profit).
• Impact on statement of financial position(asset/liability/equity effect).
• Journal cue(the double entry that explains the effect).

Inventory and cost of sales

What it corrects

Ensures cost of sales includes only the cost of goods actually sold in the period.

Impact on statement of profit or loss

Closing inventory reduces cost of sales, increasing gross profit (all else equal).

Impact on statement of financial position

Closing inventory is shown as a current asset.

Calculation and presentation

Cost of sales is commonly calculated as:

Cost of sales = Opening inventory + Purchases + Carriage inwards − Closing inventory

In many exam answers, this is shown through the cost of sales working and the closing inventory figure is shown in current assets. The journal below simply explains the effect on the accounting equation.

Journal cue (periodic inventory approach)

Closing Inventory -Dr Inventory (statement of financial position) / Cr Cost of sales (statement of profit or loss)

Accruals and prepayments

Operating expenses (rent, wages, utilities, etc.)

Accrued expense

What it corrects
Recognises costs relating to the period where the invoice has not yet been paid or recorded.

Impact on statement of profit or loss
Expense increases (profit decreases).

Impact on statement of financial position
Liabilities increase (accrual).

Journal cue
Dr Expense / Cr Accrual (liability)

Prepaid expense

What it corrects
Removes the portion of a payment that relates to a future period.

Impact on statement of profit or loss
Expense decreases (profit increases).

Impact on statement of financial position
Assets increase (prepayment).

Journal cue
Dr Prepayment (asset) / Cr Expense

Deferred (unearned) income

What it corrects
Removes income that relates to a future period where cash has been received in advance.

Impact on statement of profit or loss
Income decreases (profit decreases).

Impact on statement of financial position
Liabilities increase (deferred income).

Journal cue
Dr Income / Cr Deferred income (liability)

Depreciation

What it corrects
Spreads the cost of a long-term asset across the years it supports trading. Depreciation is an allocation method: it does not measure a fall in market value and it does not represent a cash outflow.

Impact on statement of profit or loss
Depreciation expense increases (profit decreases).

Impact on statement of financial position
The asset’s carrying amount reduces (often via accumulated depreciation).

Journal cue
Dr Depreciation expense / Cr Accumulated depreciation

Allowance for receivables

An allowance for receivables is a year-end adjustment used to present receivables at a cautious collectible amount. In introductory questions, this is often simplified to a fixed percentage of trade receivables.

What it corrects
Adjusts receivables down to an amount the business expects to collect.

Impact on statement of profit or loss
The movement in the allowance affects profit: an increase is an expense, a decrease is a reversal.

Impact on statement of financial position
Trade receivables are shown net of the allowance.

Journal cue (increase in allowance)
Dr Receivables impairment expense / Cr Allowance for receivables
(Reverse the entry if the allowance decreases.)

Incomplete records: rebuilding missing figures

Incomplete records problems arise when not all transactions have been captured through double entry. The aim is usually to reconstruct missing sales, purchases, or balances using opening and closing positions plus known cash flows.

Control-style equations

These equations work best when you are clear about what is included in the figures used (credit vs cash transactions, returns, discounts, write-offs, and any contra).

Receivables equation (credit sales)

Basic form:

Opening receivables

• Credit sales
• − Cash received from customers
• = Closing receivables

Rearranged:

Credit sales = Cash received + Closing receivables − Opening receivables

If total sales include cash sales, do not use total sales here. The receivables equation links to credit sales only. Separate cash sales first (or work from a bankings/cash analysis) before applying the relationship.

A one-line expanded form (apply items only if stated):

Opening receivables + Credit sales − Cash received − Returns − Discounts − Write-offs ± Contra = Closing receivables

Payables equation (credit purchases)

Basic form:

Opening payables

• Credit purchases
• − Cash paid to suppliers
• = Closing payables

Expanded form (apply items only if stated):

Opening payables + Credit purchases − Cash paid − Returns − Discounts ± Contra = Closing payables

Mark-up and margin

These percentages are frequently used to reconstruct sales or gross profit in incomplete records.

• Mark-upis profit as a percentage of cost.
  • If mark-up is 30% on cost: Sales = Cost × 1.30.
• Marginis profit as a percentage of sales.
  • If margin is 30% of sales: Cost = Sales × 0.70.

Partnerships: appropriation and partner accounts

Why an appropriation statement is used

A partnership’s operating profit is calculated first. The appropriation stage then shows how that profit is allocated between partners according to the agreement.

Common appropriation items include:

• Interest on capital
• Partner salaries
• Residual profit-sharing ratio
• Interest on drawings

These items do not change the partnership’s operating profit for the year. They affect how the profit is split between partners.

Interest on drawings: clear presentation

Interest on drawings is a charge to partners for amounts withdrawn. A clear presentation is:

• Add interest on drawings to profit to arrive atprofit available for appropriation, then
• Debit interest on drawings to each partner in their current account.

This makes it obvious that interest on drawings does not create extra “external” income; it is an internal reallocation between partners.

Partner current accounts

A current account records the year’s movements for each partner (profit share, drawings, interest, salary, etc.). Closing balances form part of equity in the statement of financial position.

Goodwill in partnerships

When a partner is admitted or retires, partners may reassess the business value. Goodwill represents value beyond identifiable net assets (for example, reputation, customer loyalty, and trading relationships).

Common approaches in exam-style questions:

• Goodwill recognised and kept as an intangible asset, with corresponding capital account adjustments.
• Goodwill recognised then written off immediately, leaving only the capital redistribution effect.
• Premium paid by an incoming partner, credited to existing partners’ capital accounts (or current accounts) in the agreed ratio.

Worked example

Narrative scenario

John runs a small retail business and prepares financial statements at 31 December. The following information is available for the year ended 31 December:

• Sales: £1,665,000
• Opening inventory: £9,000
• Purchases: £830,000
• Carriage inwards: £2,400
• Rent expense (per ledger): £9,600
• Wages expense (per ledger): £28,500
• Other operating expenses: £1,200
• Equipment at cost: £40,000
• Accumulated depreciation at start of the year: £10,000
• Trade receivables: £18,600
• Allowance for receivables at start of the year: £600
• Trade payables: £14,800
• Loan (non-current): £8,000
• Bank balance (per ledger): £815,100
• Capital at start of the year: £68,000
• Drawings during the year: £12,000

Year-end adjustments:

1. Closing inventory is £10,500.
2. Rent includes a prepayment of £800 at 31 December.
3. Wages owing at 31 December are £1,500.
4. Depreciation on equipment is 10% per year on cost.
5. The allowance for receivables should be 5% of trade receivables at 31 December.

Note: The bank balance is deliberately large to keep the example focused on adjustments rather than cash-flow mechanics. Assume most sales were banked and only limited payments were made through bank during the period.

In addition, John must answer short technique requirements on incomplete records and partnerships (given separately below).

Required

• Prepare a statement of profit or loss and a statement of financial position from the above information and adjustments.
• Use incomplete-record techniques to derive missing figures (given separately).
• Prepare a partnership appropriation statement and partner current accounts from given terms (given separately).
• Explain how partnership changes can affect records, including goodwill.

Solution

Statement of profit or loss for the year ended 31 December

Revenue
Sales .................................................................. £1,665,000

Cost of sales (W1) ................................................ £830,900

Gross profit ......................................................... £834,100

Operating expenses
Rent (W2) ................................................................. £8,800
Wages (W3) .............................................................. £30,000
Other operating expenses ........................................... £1,200
Depreciation (W4) ..................................................... £4,000
Receivables impairment expense (W5) ............................ £330
Total operating expenses ........................................ £44,330

Profit for the year .................................................. £789,770

Workings

W1 Cost of sales
Opening inventory 9,000 + Purchases 830,000 + Carriage inwards 2,400 − Closing inventory 10,500
= £830,900

W2 Rent (prepayment)
Rent per ledger 9,600 − Prepaid portion 800
= £8,800
(Double-entry cue: Dr Prepayment / Cr Rent expense)

W3 Wages (accrual)
Wages per ledger 28,500 + Accrued wages 1,500
= £30,000
(Double-entry cue: Dr Wages expense / Cr Accrued wages)

W4 Depreciation
10% × 40,000 = £4,000
(Double-entry cue: Dr Depreciation / Cr Accumulated depreciation)

W5 Allowance for receivables movement
Required closing allowance = 5% × 18,600 = 930
Opening allowance = 600
Increase (expense) = 930 − 600 = £330
(Double-entry cue: Dr Receivables impairment expense / Cr Allowance)

Statement of financial position at 31 December

Non-current assets
Equipment at cost .......................................................... £40,000
Accumulated depreciation (10,000 + 4,000) ..................... (£14,000)
Equipment carrying amount .................................... £26,000

Current assets
Inventory ....................................................................... £10,500
Trade receivables ........................................................ £18,600
Less: allowance for receivables ....................................... (£930)
Trade receivables (net) .................................................. £17,670
Prepaid rent (W2) .......................................................... £800
Bank ............................................................................... £815,100
Total current assets ................................................... £844,070

Total assets ................................................................ £870,070

Equity
Opening capital ............................................................... £68,000
Add: profit for the year ................................................... £789,770
Less: drawings ................................................................. (£12,000)
Closing capital ............................................................ £845,770

Liabilities
Current liabilities:
Trade payables .............................................................. £14,800
Accrued wages (W3) ...................................................... £1,500
Total current liabilities .............................................. £16,300

Non-current liabilities:
Loan ............................................................................... £8,000
Total liabilities ............................................................ £24,300

Total equity and liabilities ............................................ £870,070

Incomplete records (separate technique requirements)

Deriving credit sales from receivables and cash receipts

Given:

• Opening receivables: £8,400
• Closing receivables: £10,100
• Cash received from customers: £52,300

Credit sales = Cash received + Closing receivables − Opening receivables
= 52,300 + 10,100 − 8,400
= £54,000

If total sales include cash sales, remove cash sales first (or separate them via a bankings/cash analysis) before using the receivables equation. Adjust further for discounts, returns, write-offs, or contra only if stated.

Using mark-up to derive sales from cost

Given:

• Cost: £70,000
• Mark-up: 30% on cost

Sales = Cost × 1.30 = 70,000 × 1.30 = £91,000

Partnership appropriation and partner accounts (separate requirement)

A partnership has profit for the year of £48,000. The agreement states:

• Interest on capital: A £1,500; B £1,000
• Partner salary: A £6,000
• Residual profit-sharing ratio: A:B = 3:2
• Interest on drawings: A £400; B £250

Appropriation statement (with drawings interest presentation)

Profit for the year ............................................................ £48,000
Add: Interest on drawings (A 400 + B 250) ....................... £650
Profit available for appropriation ................................. £48,650

Appropriations:
Interest on capital (A 1,500; B 1,000) ............................... £2,500
Partner salary (A) .................................................................. £6,000
Residual profit ..................................................................... £40,150

Residual split A:B = 3:2
A: 3/5 × 40,150 = £24,090
B: 2/5 × 40,150 = £16,060

Total profit share (before drawings interest debits):
A: 1,500 + 6,000 + 24,090 = £31,590
B: 1,000 + 16,060 = £17,060

Partner current accounts (summary)

A current account
Credit: profit share .......................................................... £31,590
Debit: interest on drawings ............................................. (£400)
Net credit to A current account ........................................ £31,190

B current account
Credit: profit share .......................................................... £17,060
Debit: interest on drawings ............................................. (£250)
Net credit to B current account ........................................ £16,810

(If drawings amounts are provided in a question, they are also shown as debits in the partners’ current accounts.)

Partnership changes and goodwill (brief explanation)

When a partner is admitted or retires, partners often revise the value of the business. If goodwill is recognised, it is used to adjust partner balances so that value gained or given up is shared in the agreed way. Some questions keep goodwill on the statement of financial position; others raise goodwill to adjust capital accounts and then write it off immediately so that only partner balances are affected.

Common pitfalls and misunderstandings

• Closing inventory is an asset and reduces cost of sales; do not treat it as an expense line.
• Accruals create liabilities; prepayments create assets; both correct the period expense/income.
• The receivables equation links to credit sales only; separate cash sales first where needed.
• Write-offs, discounts, returns, and contra affect receivables without cash.
• Depreciation is an allocation method, not a cash outflow and not a market valuation adjustment.
• The profit impact of the allowance is the movement, not the closing allowance itself.
• Partnership appropriations allocate profit; they do not reduce operating profit.
• Interest on drawings is an internal reallocation between partners, not “other income”.

Summary and further reading

End-of-period reporting ensures profit and net assets are measured for the correct period. The main technical skill is applying adjustments with correct double entry so that the statement of profit or loss and the statement of financial position are both accurate and consistent. Incomplete records problems are solved by rebuilding missing figures using balance movements and cash flows, while partnerships add a profit allocation stage that must follow the agreement. Partnership changes may introduce goodwill adjustments, which must be reflected clearly and consistently in partner balances.

FAQ

How do accruals and prepayments affect the financial statements?

They correct timing. An accrual increases the current period’s expense (or reduces income) and creates a liability. A prepayment reduces the current period’s expense (or reduces income) and creates an asset. Both ensure the period’s performance and the closing position are stated correctly.

What is the difference between mark-up and margin?

Mark-up is based on cost; margin is based on sales. Always identify the base before converting between sales, cost, and profit.

How are partnership profits shared?

Profit is calculated first. Interest on drawings is treated as a charge to partners: it is commonly added back to arrive at profit available for appropriation and then debited to partners in their current accounts. Interest on capital, salaries, and the residual split are then applied according to the agreement.

What is the role of goodwill in partnerships?

Goodwill is used to reflect value beyond net identifiable assets when partner relationships change. Depending on the stated approach, it may remain recognised or be raised and then written off so that only partner balances are adjusted.

How do incomplete records techniques work?

They use relationships between opening balances, closing balances, and known cash flows. Rearranging these relationships allows missing figures such as credit sales or credit purchases to be reconstructed, with extra adjustments made for non-cash movements when stated.

Why is depreciation important?

It charges the cost of long-term assets to profit or loss over the years those assets support trading. It reduces profit each year and reduces the asset’s carrying amount without involving a cash payment.

What are common pitfalls in preparing financial statements?

Frequent errors include reversing accruals and prepayments, omitting inventory adjustments, confusing cash and credit transactions in incomplete records, mishandling allowance movements, and mis-presenting partnership appropriations. Using consistent double-entry cues and equation checks helps prevent these mistakes.

Glossary

Trial balance
A list of ledger balances at a point in time. It provides the starting figures for the financial statements and acts as a basic check that debits equal credits.

Accrued expense (accrual)
Costs that belong to the current period even though the bill has not been paid or recorded by the reporting date. The missing amount is added to the expense and the unpaid portion is shown as a liability.

Prepaid expense (prepayment)
A payment made early where some benefit belongs to the next period. The unused part is carried as an asset and only the current period’s portion is charged as an expense.

Deferred (unearned) income
Money received before the related goods or services have been provided. At the reporting date, the not-yet-earned part is shown as a liability and it becomes income only as the business performs.

Depreciation
A way of charging long-term asset cost to profit or loss over the years it supports trading. It reduces profit each year and reduces the asset’s carrying amount, without involving a cash payment.

Allowance for receivables
An adjustment that reduces receivables to an amount the business expects to collect. The year-to-year change affects profit or loss, and receivables are presented net of the allowance in the statement of financial position.

Incomplete records
A situation where full double-entry information is not available, requiring missing figures to be reconstructed using balance movements, cash analysis, and supporting information.

Mark-up
Profit expressed as a percentage of cost, commonly used to convert cost into a selling price.

Margin
Profit expressed as a percentage of sales, commonly used to analyse gross profitability and convert sales into cost.

Appropriation statement (partnership)
A statement showing how the year’s profit is allocated between partners according to the partnership agreement (for example, interest on capital, salaries, and residual profit share).

Partner current account
An account showing ongoing movements for each partner (profit share, drawings, interest, and similar items). Closing balances form part of equity.