Companies and financial accounting
Companies and financial accounting

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Companies and financial accounting

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.

Described image
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.

B293_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371