What is the difference between capital and revenue expenditure?

Capital expenditure buys, adds to or improves a non-current asset with lasting benefit, including delivery and installation, and it goes on the statement of financial position. Revenue expenditure is day-to-day running cost that is used up in the period, such as repairs, and it is an expense in the income statement. Treating one as the other is an error of principle and distorts both profit and assets.

How do you find gross profit and profit for the year?

Gross profit equals sales minus cost of sales, where cost of sales is opening inventory plus purchases minus closing inventory. Profit for the year equals gross profit plus other income (such as rent received) minus all running expenses (wages, rent, depreciation, irrecoverable debts). Drawings never appear in the income statement; they are taken off capital instead.

What is the statement of financial position?

The statement of financial position is a snapshot at one date showing what the business owns and owes. It lists non-current then current assets, and capital then non-current then current liabilities. It balances because assets equal capital plus liabilities. The capital section shows closing capital as opening capital plus profit for the year minus drawings.

How do year-end adjustments affect the financial statements?

Each ordinary trial balance item appears once, but a year-end adjustment (accrual, prepayment, depreciation, irrecoverable debts, closing inventory) has a second effect, so it changes both statements. For example, an accrual is added to the expense in the income statement and shown as a current liability in the statement of financial position. Closing inventory reduces cost of sales and appears as a current asset.

Why does the statement of financial position always balance?

Because it is built on the accounting equation, Assets equal Capital plus Liabilities. The profit calculated in the income statement is added to the owner's capital, and drawings are deducted, so the capital section and the net assets always agree. If the two sides do not balance, an item has been misplaced or an adjustment applied only once.

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Financial statements of a sole trader: N(A)-Level Principles of Accounts (SEAB 7086), covering capital and revenue expenditure, the income statement, the statement of financial position, and preparing both statements from a trial balance with year-end adjustments

An N(A)-Level Principles of Accounts (SEAB 7086) overview of the financial statements of a sole trader: telling capital expenditure from revenue expenditure, preparing the income statement to find gross profit and profit for the year, preparing the statement of financial position with its capital section, and building both from a trial balance with year-end adjustments.

Generated by Claude Opus 4.87 min readSEAB-7086Updated 2026-06-13

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this module trains
Capital and revenue expenditure
The income statement
The statement of financial position
Putting it together
Check your knowledge

What this module trains

This is where the whole subject comes together. After recording, balancing and adjusting, N(A)-Level Principles of Accounts (SEAB 7086) asks you to present the results in two statements: the income statement, which shows the profit, and the statement of financial position, which shows what the business owns and owes. This module teaches the building blocks and then the full job of turning a trial balance, with its adjustments, into both statements.

This guide links the four dot points of the module, each with its own page and practice. The subject hub is at /sg-n-level/accounting and the syllabus index at /sg-n-level/accounting/syllabus.

Capital and revenue expenditure

The capital and revenue expenditure dot point shows how to decide whether spending is an asset or an expense. Capital expenditure goes on the statement of financial position; revenue expenditure is an expense in the income statement. Getting this wrong is an error of principle that distorts both profit and assets.

The income statement

The income statement of a sole trader dot point shows the two stages: gross profit, then profit for the year. Remember

\text{Cost of sales} = \text{opening inventory} + \text{purchases} - \text{closing inventory},

and that drawings never appear here.

The statement of financial position

The statement of financial position dot point shows the order of assets and liabilities and the capital section, where closing capital is opening capital plus profit minus drawings.

Putting it together

The from trial balance to financial statements dot point shows how to sort each trial balance line and apply the year-end adjustments, each of which changes both statements.

Building both statements from figures

step 1: find gross profit

Sales $\text{S\textdollar}50{,}000$ ; opening inventory $\text{S\textdollar}4{,}000$ ; purchases $\text{S\textdollar}30{,}000$ ; closing inventory $\text{S\textdollar}6{,}000$ .
Cost of sales $= \text{S\textdollar}4{,}000 + \text{S\textdollar}30{,}000 - \text{S\textdollar}6{,}000 = \text{S\textdollar}28{,}000$ . Gross profit $= \text{S\textdollar}50{,}000 - \text{S\textdollar}28{,}000 = \text{S\textdollar}22{,}000$ .

step 2: find profit for the year

Running expenses: wages $\text{S\textdollar}9{,}000$ and rent $\text{S\textdollar}3{,}000$ , total $\text{S\textdollar}12{,}000$ . Profit for the year $= \text{S\textdollar}22{,}000 - \text{S\textdollar}12{,}000 = \text{S\textdollar}10{,}000$ .

step 3: complete the capital section

Opening capital $\text{S\textdollar}40{,}000$ ; add profit $\text{S\textdollar}10{,}000$ ; less drawings $\text{S\textdollar}5{,}000$ . Closing capital $= \text{S\textdollar}40{,}000 + \text{S\textdollar}10{,}000 - \text{S\textdollar}5{,}000 = \text{S\textdollar}45{,}000$ .

step 4: check it balances

Net assets (assets minus liabilities) must equal closing capital of $\text{S\textdollar}45{,}000$ . The closing inventory of $\text{S\textdollar}6{,}000$ appears as a current asset, and any accrual or prepayment is placed as a current liability or current asset, so each adjustment has changed both statements.

The financial statements of a sole trader pull together N(A)-Level Principles of Accounts (SEAB 7086). Capital expenditure (lasting benefit to a non-current asset) goes on the statement of financial position, while revenue expenditure (running cost used up) is an expense in the income statement. The income statement has two stages: gross profit equals sales minus cost of sales (opening inventory plus purchases minus closing inventory), and profit for the year equals gross profit plus other income minus running expenses, with drawings never appearing. The statement of financial position lists non-current then current assets, and capital then liabilities, balancing because assets equal capital plus liabilities; closing capital is opening capital plus profit minus drawings. Building both from a trial balance means sorting each line and applying year-end adjustments, each of which changes both statements.

Check your knowledge

A mix of recall and calculation questions across the module. Work each fully, then check against the solutions.

Classify each as capital or revenue expenditure: buying a delivery van; repairing the van; installing new shelving; paying the electricity bill. (4 marks)
Sales are $\text{S\textdollar}40{,}000$ , opening inventory $\text{S\textdollar}3{,}000$ , purchases $\text{S\textdollar}25{,}000$ and closing inventory $\text{S\textdollar}5{,}000$ . Calculate cost of sales and gross profit. (3 marks)
Gross profit is $\text{S\textdollar}18{,}000$ and running expenses total $\text{S\textdollar}11{,}000$ . Calculate the profit for the year. (2 marks)
Opening capital is $\text{S\textdollar}30{,}000$ , profit for the year is $\text{S\textdollar}9{,}000$ and drawings are $\text{S\textdollar}4{,}000$ . Calculate closing capital. (2 marks)
State where closing inventory appears in the financial statements. (2 marks)
Explain why drawings do not appear in the income statement. (2 marks)

Solutions

Q1: Buying a delivery van: capital. Repairing the van: revenue. Installing new shelving: capital. Paying the electricity bill: revenue.
Q2: Cost of sales $= \text{S\textdollar}3{,}000 + \text{S\textdollar}25{,}000 - \text{S\textdollar}5{,}000 = \text{S\textdollar}23{,}000$ . Gross profit $= \text{S\textdollar}40{,}000 - \text{S\textdollar}23{,}000 = \text{S\textdollar}17{,}000$ .
Q3: Profit for the year $= \text{S\textdollar}18{,}000 - \text{S\textdollar}11{,}000 = \text{S\textdollar}7{,}000$ .
Q4: Closing capital $= \text{S\textdollar}30{,}000 + \text{S\textdollar}9{,}000 - \text{S\textdollar}4{,}000 = \text{S\textdollar}35{,}000$ .
Q5: Closing inventory is deducted in cost of sales in the income statement, and it appears as a current asset in the statement of financial position.
Q6: Drawings are the owner taking value out of the business, not a cost of earning income, so they are not an expense. They are deducted from capital in the statement of financial position instead.

Sources & how we know this

Principles of Accounts (Syllabus 7086) — Singapore Examinations and Assessment Board (2026)