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Form 4 · Chapter 7

Financial Statements of a Sole Proprietorship without Adjustments

Penyata Kewangan Milikan Tunggal tanpa Pelarasan

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What this chapter covers

Form 4 Chapter 7 takes you to the end of the accounting cycle for a sole proprietorship: preparing financial statements without adjustments. After transactions are recorded in journals, posted to the ledger, and balanced in the trial balance (Chapters 5 and 6), two big questions remain: did the business make a profit or a loss, and what is it worth on a given date? This chapter teaches you to answer both questions through the Trading and Profit and Loss Account (which produces gross profit and net profit) and the Statement of Financial Position (which shows assets, liabilities and owner's equity).

The phrase 'without adjustments' matters. In this chapter, figures from the trial balance are taken directly, with no adjustment for accrued expenses, revenue received in advance, depreciation or bad debts. All of that is covered in Chapter 8. The focus here is the correct structure, format and flow of numbers: where gross profit comes from, how it becomes net profit, and how that net profit flows into owner's equity in the Statement of Financial Position.

The chapter is built on three content standards (Standard Kandungan, SK): (7.1) the Trading and Profit and Loss Account in T-form and statement format; (7.2) the Statement of Financial Position; and (7.3) closing revenue, expense and inventory accounts at the end of the financial period. Once you know all three, you will understand how a ledger full of figures becomes two financial documents read by the owner, the bank and other stakeholders. This chapter is also the foundation for almost every Form 5 topic, so a weakness here will follow you unless it is fixed now.

Content Standards

7.1 Trading and Profit and Loss Account (T-Form and Statement Format)

Akaun Perdagangan dan Untung Rugi (bentuk T dan format penyata)

Learning Standards (official DSKP wording, in Malay)

  • 7.1.1Menerangkan tujuan penyediaan Akaun Perdagangan dan Akaun Untung Rugi
  • 7.1.2Menyediakan Akaun Perdagangan
  • 7.1.3Memindahkan Untung Kasar atau Rugi Kasar ke Akaun Untung Rugi
  • 7.1.4Menyediakan Akaun Untung Rugi
  • 7.1.5Memindahkan Untung Bersih atau Rugi Bersih ke dalam akaun modal
  • 7.1.6Menyediakan Akaun Perdagangan dan Untung Rugi berdasarkan maklumat daripada Imbangan Duga secara manual atau menggunakan aplikasi TMK

7.2 Statement of Financial Position

Penyata Kedudukan Kewangan

Learning Standards (official DSKP wording, in Malay)

  • 7.2.1Menerangkan tujuan penyediaan Penyata Kedudukan Kewangan
  • 7.2.2Menyediakan Penyata Kedudukan Kewangan dalam bentuk ’T’ dan format penyata berdasarkan maklumat daripada Imbangan Duga
  • 7.2.3Menyediakan Akaun Modal dengan mengambil kira ambilan dan untung bersih atau rugi bersih
  • 7.2.4Menyediakan bahagian ekuiti pemilik berdasarkan akaun modal yang telah disediakan
  • 7.2.5Menyediakan Penyata Kedudukan Kewangan dalam bentuk penyata berdasarkan maklumat daripada Imbangan Duga menggunakan aplikasi TMK

7.3 Closing Revenue, Expense and Inventory Accounts at the End of the Financial Period

Penutupan akaun hasil, akaun belanja dan akaun inventori pada akhir tempoh kewangan

Learning Standards (official DSKP wording, in Malay)

  • 7.3.1Menerangkan keperluan penutupan akaun hasil dan akaun belanja dalam proses kitaran perakaunan
  • 7.3.2Menerangkan tatacara menutup akaun yang berkaitan dengan betul
  • 7.3.3Menutup akaun hasil dan akaun belanja yang berkaitan untuk memindahkan ke Akaun Perdagangan
  • 7.3.4Menutup akaun inventori dengan menghubung kaitkan sistem catatan bergu pada akhir tempoh kewangan
  • 7.3.5Menutup akaun hasil dan belanja berkaitan untuk memindahkan ke Akaun Untung Rugi
  • 7.3.6Menerangkan sebab akaun nyata tidak ditutup pada akhir tempoh kewangan

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

Key ideas in this chapter

Where this chapter sits in the accounting cycle

Financial statements are the final step of the accounting cycle. The sequence is: transaction → source document → journal → ledger → trial balance → financial statements. Every figure you use in this chapter comes from a balanced trial balance. Debits in the trial balance (assets, expenses, drawings, purchases) and credits (capital, liabilities, revenue, sales) are distributed to their correct places in the statements.

Quick example: if the trial balance shows Sales RM80,000 (credit) and Purchases RM50,000 (debit), Sales goes to the top of the Trading Account and Purchases becomes part of cost of sales. No new transactions are recorded here; you only rearrange existing figures into a meaningful format.

Trading Account: calculating gross profit

The Trading Account determines gross profit, the profit from buying and selling goods alone, before deducting operating expenses. The formula is: Gross Profit = Net Sales - Cost of Sales. Net Sales = Sales - Sales Returns. Cost of Sales = Opening Inventory + Net Purchases - Closing Inventory.

T-form example: on the credit side of the Trading Account record Sales RM80,000 (less Sales Returns RM2,000, giving Net Sales RM78,000). On the debit side record Opening Inventory RM10,000 and Net Purchases RM48,000, less Closing Inventory RM12,000, giving Cost of Sales RM46,000. Gross Profit = RM78,000 - RM46,000 = RM32,000, carried down to the Profit and Loss Account.

Net purchases and the components of cost of sales

Net Purchases is not the same as the Purchases figure. Net Purchases = Purchases - Purchases Returns + Carriage Inwards + Duty on Purchases. Carriage inwards and import duty are added because they increase the cost of acquiring goods for resale. Purchases Returns is deducted because returned goods reduce purchases.

Example: Purchases RM50,000, less Purchases Returns RM3,000, plus Carriage Inwards RM1,000, gives Net Purchases RM48,000. Remember, Carriage Outwards (carriage on sales) does NOT go here, because it is a selling expense in the Profit and Loss Account. Misplacing carriage is the most common error in this chapter.

Profit and Loss Account: calculating net profit

The Profit and Loss Account begins with gross profit brought down, adds other revenue, and deducts all operating expenses. Net Profit = Gross Profit + Other Revenue - Total Expenses. Other revenue includes Commission Received, Discount Received, Rent Received and Interest Received. Expenses include Salaries, Rent Paid, Rates, Insurance, Carriage Outwards and General Expenses.

Example: Gross Profit RM32,000, plus Commission Received RM2,000, gives RM34,000. Less Salaries RM12,000, Rent RM6,000, Insurance RM1,500, Carriage Outwards RM500, total expenses RM20,000. Net Profit = RM34,000 - RM20,000 = RM14,000. If expenses exceed this figure, the result is a Net Loss.

Statement format (vertical Income Statement)

Besides the T-form, SK 7.1 requires you to prepare the vertical statement format called the Income Statement. The layout is vertical: Net Sales at the top, less Cost of Sales to get Gross Profit, add revenue, less expenses to get Net Profit. The heading must be complete: 'Perniagaan Maju, Income Statement for the year ended 31 December 2025'.

Example layout: Net Sales RM78,000, less Cost of Sales RM46,000, Gross Profit RM32,000, add Commission Received RM2,000 (giving RM34,000), less total expenses RM20,000, Net Profit RM14,000. This format is neater and easier for the owner to read than the T-form, but it produces the same figures.

Statement of Financial Position: structure

The Statement of Financial Position shows the position of the business on a specific date. Its basic equation: Assets = Owner's Equity + Liabilities. Assets are split into Non-current Assets (land, buildings, vehicles, furniture, fittings) and Current Assets (closing inventory, debtors, bank, cash). Liabilities are split into Non-current Liabilities (long-term bank loans) and Current Liabilities (creditors, bank overdraft).

Simple example: Non-current Assets RM40,000 (vehicle) plus Current Assets RM30,000 (inventory RM12,000, debtors RM10,000, bank RM8,000) gives Total Assets RM70,000. This must equal Owner's Equity plus Liabilities. The heading must read 'as at 31 December 2025' (a single date, not a period).

Owner's equity: capital, net profit and drawings

Owner's Equity in the Statement of Financial Position is not fixed: it is recalculated each period. Closing Equity = Opening Capital + Net Profit - Drawings. Net profit increases equity because it belongs to the owner; drawings (cash or stock the owner takes for personal use) reduce equity. If there is a net loss, it is subtracted, not added.

Example: Opening Capital RM50,000, plus Net Profit RM14,000, gives RM64,000, less Drawings RM4,000, gives Closing Equity RM60,000. If the business has a bank loan of RM10,000 (non-current liability), then Equity RM60,000 + Liabilities RM10,000 = RM70,000, matching Total Assets RM70,000. This balance is your main check that the statement is correct.

Closing revenue, expense and inventory accounts (SK 7.3)

At the end of the financial period, revenue and expense accounts must be closed so they restart at zero for the next period. The Sales account is closed to the Trading Account: Debit Sales, Credit Trading Account. The Purchases account is closed: Debit Trading Account, Credit Purchases. An expense account such as Salaries is closed: Debit Profit and Loss Account, Credit Salaries. An other-revenue account such as Commission Received: Debit Commission Received, Credit Profit and Loss Account.

For inventory: Opening Inventory is transferred to the Trading Account (Debit Trading Account, Credit Inventory Account). Closing Inventory is recorded as a balance: Debit Inventory Account RM12,000, Credit Trading Account RM12,000. This closing inventory balance is brought down (b/d) and appears as a current asset in the Statement of Financial Position. Finally Net Profit is closed to the Capital account: Debit Profit and Loss Account, Credit Capital Account.

Checking your work the right way

The best way to confirm your statements are correct is to check the balance of the Statement of Financial Position: Total Assets must equal Owner's Equity plus Total Liabilities. If it does not balance, the likely causes are forgetting to include closing inventory, failing to deduct drawings from equity, or misplacing carriage. Also verify that each trial balance item has been used exactly once.

A good habit is to cross-check every figure twice: once as you transfer it from the trial balance, and again after the statement is complete. Closing inventory must appear in two places: as a deduction within cost of sales in the Trading Account and as a current asset in the Statement of Financial Position. Opening capital, net profit and drawings must be traced carefully so that closing equity is exact. The most effective way to learn this chapter is to prepare statements from trial balances again and again.

Common mistakes

Study plan for this chapter

  1. Memorise and understand the three core formulas: Gross Profit = Net Sales - Cost of Sales; Cost of Sales = Opening Inventory + Net Purchases - Closing Inventory; Net Profit = Gross Profit + Other Revenue - Expenses.
  2. Make a complete list of which item goes to the Trading Account, which to the Profit and Loss Account, and which to the Statement of Financial Position. Practise classifying every trial balance line until it is automatic.
  3. Get Net Purchases right first (add carriage inwards and duty, subtract purchases returns), because this is where most errors happen.
  4. Practise preparing statements in both T-form and vertical statement format from the same trial balance, and check that the final figures match.
  5. Practise the closing entries of SK 7.3 separately: close sales, purchases, each expense, revenue, inventory, and transfer net profit to capital.
  6. Each time you finish, check the balance: Total Assets must equal Owner's Equity plus Total Liabilities; if not, trace drawings, closing inventory and carriage.
  7. Work full-format past-year questions under timed conditions, and mark your own answers using the common-errors list above.

FAQ

What is the difference between gross profit and net profit?
Gross profit is the profit from buying and selling goods alone, calculated in the Trading Account as Net Sales minus Cost of Sales. Net profit is gross profit plus other revenue minus all operating expenses, calculated in the Profit and Loss Account. Net profit is the profit that belongs to the owner after all expenses.
Why do Carriage Inwards and Carriage Outwards go in different places?
Carriage Inwards is the cost of delivering purchased goods to the business premises, so it increases the cost of goods and is added within Net Purchases in the Trading Account. Carriage Outwards is the cost of delivering goods to customers, a selling expense, so it goes in the Profit and Loss Account.
Why does the Statement of Financial Position heading use 'as at' rather than 'for the year ended'?
The Statement of Financial Position is a snapshot of assets, liabilities and equity on a specific date, so its heading uses 'as at 31 December 2025'. The Income Statement, by contrast, covers a whole period, so its heading uses 'for the year ended 31 December 2025'.
How does net profit affect owner's equity?
Net profit is added to opening capital in the equity calculation: Closing Equity = Opening Capital + Net Profit - Drawings. Profit increases the value owned by the proprietor, while drawings reduce it. If there is a net loss, it is subtracted instead.
What does 'without adjustments' mean in this chapter?
It means figures in the trial balance are used directly, with no adjustment for items such as accrued expenses, revenue received in advance, depreciation or bad debts. Those adjustments are learned in Form 4 Chapter 8; here the focus is the basic structure and format of the statements.
I still get confused classifying items. What can I do?
Practise classifying every trial balance line until it comes easily. For closer guidance, our experienced teachers give online 1-to-1 lessons from RM50/hour. The one-hour trial class is paid; WhatsApp for the exact rate.

Learning materials for this chapter

Other chapters

Introduction to Accounting

Chapter 1

View

Classification of Accounts and the Accounting Equation

Chapter 2

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Business Documents as a Source of Information

Chapter 3

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Books of Prime Entry

Chapter 4

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Ledger

Chapter 5

View

Trial Balance

Chapter 6

View

Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements

Chapter 8

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Correction of Errors

Chapter 9

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All chapters →

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