5 Comparing sole trader and company financial statement formats
The balance sheet is the fundamental financial statement because it expresses the balance sheet equation [Assets = Capital + Liabilities or Assets – Liabilities = Capital] which underlies double-entry bookkeeping and financial accounting. The balance sheet summarises the balances in the general ledger accounts related to assets [the resources of the business], liabilities [the debts and other obligations of the business] and capital [the owners’ equity] at a date. The balance sheet shows the financial position of the business at a point in time.
The income statement summarises the changes in assets and liabilities [recorded as the flow of income and expenses during a period of time] that generated the profit or loss for the period. The income statement shows the financial performance of the business over a period of time.
Flow statements for a period link the balance sheet at the start of the period to the balance sheet at the end of the period. The income statement is a flow statement because it shows how income and expenses caused the increase or decrease in capital from one period to the next. The cash flow statement is a flow statement because it shows the increase or decrease in cash from one period to the next. The statement of changes in equity is also a flow statement.
Figure 6 below shows an example of how the flow statements link the opening and closing balance sheets.
Figure 6 An example showing the relationship between stocks and flows of William’s business
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Figure 6 shows William’s balance sheet as at 2 January on the left hand side [the stock statement at the start of the period] and William’s balance sheet as at 6 January on the right hand side [the stock statement at the end of the period]. The stock statement at the start of the period shows Bank £10,000 in blue and Owner’s capital £10,000 in purple. Debit side: Total assets £10,000 = Credit side: Total capital £10,000. The stock statement at the end of the period shows Bank £7,400 in blue and owner’s capital £11,400 in purple. In black it shows also on the debit side the assets of van £4,000 and computer £2,000. In black it shows on the credit side a loan of £2,000. Hence total assets [Bank + Van + Computer] £13,400 = total capital and liabilities £13,400. The flow statements link these two balance sheets at two points in time by showing what happened during that period. The first flow statement is the income statement for the period ended 6 January. It shows in black £1,500 sales less £1,000 cost of sales = £500 profit, whereby the profit number is shown in orange. The second flow statement is William’s cash flow statement which reconciles the opening bank balance of £10,000 at 2 January with the closing bank balance of £7,400 at 6 January [both in blue]. Opening cash £10,000 plus £3,500 cash inflow less £6,100 cash outflow leads to a net cash outflow of £2,600 during the period. The third flow statement is William’s statement of changes in capital for the period ended 6 January which reconciles opening capital £10,000 [purple] to closing capital £11,400 [purple] by adding £1,000 of capital introduced during the period and the profit for the period of £500 [orange], and then deducting drawings of £100.
Figure 6 An example showing the relationship between stocks and flows of William’s business
In Section 5.1 you will look at the balance sheet and income statement for a sole trader. In Section 5.2 you will look at the same financial statements for a company. Section 5.3 discusses the statement of changes in equity for a company and Section 5.4 looks at cashflow statement for a company.
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All self-employed persons must calculate and report their business income as part of their total personal income in Form B/B1. Freelancers, commission agents, hawkers, taxi drivers, sole-proprietors and partners in a partnership are self-employed persons.
Sole-Proprietors and Partners
Generally, sole-proprietors and partners registered with the Accounting and Corporate Regulatory Authority [ACRA] are self-employed. You are also considered a self-employed person if you earn a living by carrying on a trade, business, profession or vocation.
Examples of Self-Employed Persons
- Baby-sitter
- Commission agent [e.g. insurance agent, real estate agent]
- Direct seller
- Freelancer, i.e. you receive fees for providing services as a delivery rider, consultant, book keeper, graphic designer, fitness instructor
- Hawker, i.e. you are the owner of a hawker business or a food stall
- Owner of a business that buys and sells goods and/or services
- Owner of an online business, i.e. you buy and sell goods or provide services through the Internet
- Owner of your own practice [e.g. accountant, architect, doctor, lawyer]
- Private-hire car driver/ Taxi driver
- Private tuition teacher, i.e. you are not employed by any tuition centres and you get your students through referrals
Summary of Filing Obligations for Sole-Proprietors, Precedent Partners and Individual Partners
Form B/B1 | Form P | Form B/B1 |
Sole-proprietors should enter their income under "Sole-Proprietorship" > "Trade, Business, Profession or Vocation". | The precedent partner should file Form P and inform the partners of their share of the business income. Thereafter, each partner should enter their share of business income into their Form B/B1 when filing their individual tax returns as income under "Partnership" > "Trade, Business, Profession or Vocation". e-Filing of Form P will be available from 1 Feb. If a partnership e-Files the Form P by 28 Feb 2022, the partnership allocation will be pre-filled in the respective partners' Form B/B1. With this pre-filling initiative, the precedent partner need not separately inform the respective partners of their share of the partnership income and the individual partners can enjoy the convenience of having their tax return pre-filled. | The individual partner should enter their share of the business income under "Partnership" > "Trade, Business, Profession or Vocation". However, if the precedent partner of the partnership e-Files the Form P by 28 Feb 2022, the partnership allocation will be pre-filled in the respective partners' Form B/B1. |
Business income is taxable at individual personal income tax rates. | Partnership income is only taxed in the hands of the individual partner at his personal income tax rates. | The share of profit or loss allocated to each partner will be taxed under each individual partner's name at his personal income tax rates. |
Calculating the Adjusted Profit/Loss
Use this formula to arrive at the adjusted profit/loss for reporting to IRAS:
XX |
[XX] |
XX |
[XX] |
XX |
Revenue
Example
This is the total receipts of your business which may be:
- bills paid or unpaid sent to customers
- payments or fees received for services provided
- sales proceeds from goods sold
- the selling price of goods or materials used - but not for business purposes [for example, goods are taken from your stock for your personal use]
Revenue is the total gross income received from your business.
Gross Profit/Loss
Example
Allowable Business Expenses
Example
Adjusted Profit/Loss
Example
Preparing the Statement for Reporting Adjusted Profit/Loss for Sole-Proprietorship
Increase in Revenue threshold of 2-line statement to $200,000 for sole-proprietorship from Year of Assessment [YA] 2021 onwards
The revenue threshold for reporting of 2-line statement i.e. Revenue and Adjusted
Profit/Loss, is increased from $100,000 to $200,000 from YA 2021 for sole-proprietorships. The raising of the revenue threshold from $100,000 to $200,000 for the filing of 2-line statement for sole-proprietorships is part of IRAS’ continuous efforts to simplify tax filing for small businesses.
IRAS requires business income to be reported using a 2-line or 4-line statement. You should use the 4-line statement when your revenue is more than $200,000.
2-Line Statement
You should report your business income using the 2-line statement when your revenue is $200,000 or less [$100,000 or less for YA 2020 and before].
First line | Revenue | $____________ |
Second line | Adjusted Profit/Loss | $____________ |
Example 1: 2-Line Statement of a Tuition Teacher
Example
Tina, a tuition teacher, earns $40,000 a year giving tuition. She earns ≤ $200,000 and, therefore, may report her income using the 2-line statement. In this case, her net earnings as a tuition teacher will be $30,000 [assuming her expenses is $10,000]
$ 40,000 |
$ 30,000 |
4-Line Statement
You should report your business income using the 4-line statement when your revenue is more than $200,000 [more than $100,000 for YA 2020 and before].
First line | Revenue | $_______________ |
Second line | Gross Profit/Loss | $_______________ |
Third line | Allowable Business Expenses | $_______________ |
Fourth line | Adjusted Profit/Loss | $_______________ |
Example 2: 4-Line Statement of Seller of Mobile Phones
Example
Gerald buys and sells mobile phones. He sold $300,000 of mobile phone last year. The cost of goods sold was $120,000 and his allowable business expense is $20,000. Gerald should use the 4-line statement to report his business income.
$ 300,000 |
$ 120,000 |
$ 180,000 |
$ 20,000 |
$ 160,000 |
Summary Table
Prepare statement of accounts and keep proper records of your business transactions | Yes | Yes | Yes |
Report 2-line statement:
| Yes | - | - |
Report 4-line statement :
| - | Yes | Yes |
Submit certified statement of accounts and Computation of Adjusted Profit / Loss [XLS,30.4KB] | - | - | Yes |
Preparing the Statement for Reporting Adjusted Profit/Loss for Partnership
2-Line Statement [New]
With effect from YA 2022, the 2-line statement is extended to partnerships with revenue of $200,000 or less as part of IRAS’ continuous efforts to simplify tax filing for small businesses.
You have to report the partnership income in the Form P using the 2-line statement when your revenue is $200,000 or less from YA 2022.
First line | Revenue | $_________________ |
Second line | Adjusted Profit/Loss | $_________________ |
4-Line Statement
You have to report the partnership income in the Form P using the 4-line statement when your revenue is more than $200,000 from YA 2022.
For YA 2021 and before, the partnership income is to be reported in the Form P using the 4-line statement regardless of the amount of revenue earned.
First line | Revenue | $______________ |
Second line | Gross Profit/Loss | $______________ |
Third line | Allowable Business Expenses | $______________ |
Fourth line | Adjusted Profit/Loss | $______________ |
Calculating and Reporting the Divisible Profit/Loss for Partnership
Calculating Divisible Profit/Loss
Divisible profit/loss is the adjusted profit/loss minus partners' salaries, allowances, bonuses, CPF contributions, interest on capital and any other expenses paid on behalf of all the partners.
Use this formula to arrive at divisible profit for reporting to IRAS.
XX |
[XX] |
[XX] |
[XX] |
[XX] |
[XX] |
[XX] |
Please note that if the total taxable revenue of all your sole-proprietorship businesses exceeded $1 million in the last 12 months, or is expected to exceed $1 million in the next 12 months, you should register yourself for GST.
Example: Distribution of Divisible Profit/Loss Between Two Partners
AB Partnership is made up of Partner A and Partner B. It was agreed between Partner A and Partner B that a yearly salary of $26,000 and $24,800 will be paid to them respectively and the basis of sharing of divisible profit is 60:40.
For the year ended 31 Dec 2020, the partnership made a profit of $34,000 [after deducting partners' salaries]. Partner A and Partner B have decided to retain the profit in the partnership for business use. The income for A and B will be as follows:
Basis of Sharing | 60% | 40% | 100% |
Salary for year ended 31 Dec 2020 | $26,000 | $24,800 | $50,800 |
Divisible Profit on a Total Profit of $34,000 [60:40] | $20,400 [60% x $34,000] | $13,600 [40% x $34,000] | $34,000 |
Total Adjusted Profit [Salary + Divisible Profit] | $46,400 | $38,400 | $84,800 |
Partner A and Partner B's share of partnership income is $46,400 and $38,400 respectively. The income will be taxed under each individual partner's names even though the divisible profit of $34,000 was retained in the partnership account.
Reporting Divisible Profit/Loss
The precedent partner reports the income earned and business expenses annually to IRAS using Form P. You can use this sample working sheet [XLS, 35KB] as a guide. For details, refer to Filing for Precedent Partners.
After the precedent partner file the Form P, the precedent partner must inform the other self-employed partner of their share of profit or loss which they will declare as their business income in Form B/B1.
The precedent partner can refer to the responsibilities of precedent partners for more details.