What is the difference between capital and revenue expenditure?

Capital expenditure is spending to acquire or improve a non-current asset, giving benefit over several years; it is recorded as an asset in the statement of financial position. Revenue expenditure is the day-to-day running cost of the business, such as repairs, wages and rent, used up within the period; it is charged as an expense in the income statement. Misclassifying one as the other distorts both profit and the asset values.

How is a sole proprietor's income statement structured?

The income statement first finds gross profit, which is sales (less returns inwards) minus the cost of sales (opening inventory plus purchases less returns outwards, less closing inventory). Other income is added, and then all the operating expenses are deducted to give the profit for the year. Gross profit measures trading performance, while profit for the year is the final result after all expenses.

How do year-end adjustments flow into the financial statements?

Each adjustment affects both statements. An accrued expense increases the expense in the income statement and appears as a current liability; a prepayment reduces the expense and appears as a current asset. Depreciation is an expense in the income statement and reduces the asset's net book value. An allowance for doubtful debts reduces profit and is deducted from trade receivables.

How do you prepare financial statements from a trial balance?

Take each balance and decide where it belongs: income and expense balances go to the income statement, and asset, liability and capital balances go to the statement of financial position. Apply the year-end adjustments (closing inventory, accruals, prepayments, depreciation and doubtful debts) as you go. The profit for the year links the two statements through the capital section.

SingaporeAccounting

Financial statements of a sole proprietor: O-Level Principles of Accounts (SEAB/Cambridge 7087), covering capital and revenue expenditure, the income statement from gross profit to profit for the year, the statement of financial position and the capital account, the effect of year-end adjustments on the statements, and preparing a full set from a trial balance

Q: What is in the statement of financial position of a sole proprietor?

It lists assets, liabilities and the owner's capital at a point in time. Non-current and current assets are shown, then current and non-current liabilities. The capital section starts with opening capital, adds the profit for the year (or subtracts a loss), and subtracts drawings to give closing capital. Total assets less total liabilities equals the closing capital, reflecting the accounting equation.

An O-Level Principles of Accounts (SEAB 7087) overview of the financial statements of a sole proprietor: capital versus revenue expenditure, the income statement from gross profit to profit for the year, the statement of financial position and capital account, the effect of adjustments, and preparing a full set from a trial balance.

Generated by Claude Opus 4.86 min readSEAB-7087Updated 2026-06-13

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

Jump to a section

Where everything comes together
Classifying spending and building the income statement
The statement of financial position, adjustments and the full set
Check your knowledge

Where everything comes together

The financial statements are the destination of the whole accounting process in O-Level Principles of Accounts (SEAB/Cambridge 7087). Every transaction recorded, every adjustment made, and every balance listed in the trial balance ends up here, in the income statement and the statement of financial position of a sole proprietor. Because preparing a full set is a major task in the 7087 papers, this module rewards both correct figures and correct presentation, with marks for each.

This guide links the five dot points of the module. The subject hub is at /sg-o-level/accounting and the syllabus index at /sg-o-level/accounting/syllabus.

Classifying spending and building the income statement

The capital and revenue expenditure dot point shows how to split spending into capital (an asset) and revenue (an expense) and the effect of misclassifying it. The income statement dot point builds the statement up from gross profit to profit for the year. Gross profit is

\text{gross profit} = \text{net sales} - \text{cost of sales},

where cost of sales is opening inventory plus net purchases less closing inventory.

The statement of financial position, adjustments and the full set

The statement of financial position dot point covers the layout of assets, liabilities and the capital section. The effect of adjustments on statements dot point traces how each year-end adjustment touches both statements, and the financial statements from a trial balance dot point shows how to turn a trial balance into a complete set.

Gross profit, profit for the year and the capital section

step 1: calculate the cost of sales

Opening inventory $\text{S\textdollar}6{,}000$ , purchases $\text{S\textdollar}40{,}000$ , closing inventory $\text{S\textdollar}8{,}000$ .
Cost of sales $= \text{S\textdollar}6{,}000 + \text{S\textdollar}40{,}000 - \text{S\textdollar}8{,}000 = \text{S\textdollar}38{,}000$ .

step 2: calculate gross profit

Net sales $= \text{S\textdollar}70{,}000$ .

\text{gross profit} = \text{S\textdollar}70{,}000 - \text{S\textdollar}38{,}000 = \text{S\textdollar}32{,}000.

step 3: calculate profit for the year

Operating expenses (rent, wages and depreciation) total $\text{S\textdollar}19{,}000$ .
Profit for the year $= \text{S\textdollar}32{,}000 - \text{S\textdollar}19{,}000 = \text{S\textdollar}13{,}000$ .

step 4: complete the capital section

Opening capital $\text{S\textdollar}50{,}000$ , drawings $\text{S\textdollar}9{,}000$ .
Closing capital $= \text{S\textdollar}50{,}000 + \text{S\textdollar}13{,}000 - \text{S\textdollar}9{,}000 = \text{S\textdollar}54{,}000$ , which equals total assets less total liabilities in the statement of financial position.

The financial statements of a sole proprietor are the destination of the whole process in O-Level Principles of Accounts (SEAB/Cambridge 7087). Capital expenditure buys or improves a non-current asset and is shown as an asset; revenue expenditure is a running cost and is an expense. The income statement finds gross profit ( $\text{net sales} - \text{cost of sales}$ , where cost of sales is opening inventory plus net purchases less closing inventory), then deducts operating expenses to give profit for the year. The statement of financial position lists assets, liabilities and the capital section (opening capital plus profit less drawings). Year-end adjustments touch both statements, and the profit for the year links them. Both correct figures and correct presentation earn marks.

Check your knowledge

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

Distinguish between capital and revenue expenditure with one example of each. (3 marks)
State the formula for cost of sales. (2 marks)
Opening inventory is $\text{S\textdollar}5{,}000$ , purchases $\text{S\textdollar}30{,}000$ and closing inventory $\text{S\textdollar}7{,}000$ . Calculate the cost of sales. (2 marks)
Net sales are $\text{S\textdollar}60{,}000$ and cost of sales is $\text{S\textdollar}38{,}000$ . Calculate the gross profit. (2 marks)
Opening capital is $\text{S\textdollar}40{,}000$ , profit for the year is $\text{S\textdollar}11{,}000$ , and drawings are $\text{S\textdollar}6{,}000$ . Calculate the closing capital. (3 marks)
State how depreciation appears in both financial statements. (2 marks)

Solutions

Q1: Capital expenditure acquires or improves a non-current asset and is shown as an asset, for example buying a delivery van. Revenue expenditure is a running cost charged as an expense, for example repairing the van.
Q2: Cost of sales $=$ opening inventory $+$ net purchases $-$ closing inventory.
Q3: Cost of sales $= \text{S\textdollar}5{,}000 + \text{S\textdollar}30{,}000 - \text{S\textdollar}7{,}000 = \text{S\textdollar}28{,}000$ .
Q4: Gross profit $= \text{S\textdollar}60{,}000 - \text{S\textdollar}38{,}000 = \text{S\textdollar}22{,}000$ .
Q5: Closing capital $= \text{S\textdollar}40{,}000 + \text{S\textdollar}11{,}000 - \text{S\textdollar}6{,}000 = \text{S\textdollar}45{,}000$ .
Q6: Depreciation is an expense in the income statement (reducing profit) and is deducted from the asset's cost (as accumulated depreciation) to give the net book value in the statement of financial position.

Sources & how we know this

Principles of Accounts (Syllabus 7087) — Singapore Examinations and Assessment Board (2026)
Singapore-Cambridge GCE Ordinary Level (joint SEAB and Cambridge examination) — Singapore Examinations and Assessment Board / Cambridge Assessment International Education (2026)