Question 1

Why isn't the owner's salary shown as an expense in the income statement?

Accepted Answer

A sole trader and their business are not legally separate. The owner cannot be an employee of themselves. Any money the owner takes is a withdrawal of profit, known as 'drawings', not a salary expense incurred to generate revenue. The entire profit for the year belongs to the owner and is their reward.

Question 2

What is the difference between 'drawings' and 'expenses'?

Accepted Answer

Expenses are costs incurred in the process of generating revenue for the business (e.g., rent, electricity, wages for staff). They are deducted from revenue in the Income Statement. Drawings are withdrawals of assets by the owner for personal use. They are not related to generating revenue and are deducted from capital in the Statement of Financial Position.

Question 3

If a sole trader uses their personal bank account to pay for a business expense, how is this recorded?

Accepted Answer

This is treated as an injection of capital by the owner. The double entry would be to Debit the relevant expense account (e.g., Dr Stationery) and Credit the Capital account. This correctly records the business expense and shows that the owner has contributed more funds to the business.

Sole traders

What you need to know

Sole traders