How FreeAgent handles the year end for a sole trader
This article explains what happens at the year end for a sole trader in FreeAgent.
At the end of an accounting year, a business’s profit and loss accounts are ‘cleared down’ to retained profits (code 968 in FreeAgent) so that the business can measure profit and loss for the following year. FreeAgent clears the accounts down automatically for you.
Below are the steps that FreeAgent takes for the year-end process for a sole trader.
1. Individual categories in the profit and loss account are cleared
If an account in the profit and loss account has a credit balance, for example ‘Sales’, FreeAgent adds an equal debit entry to bring the account balance back to zero and adds a corresponding credit entry in the retained profit account.
If an account in the profit and loss account has a debit balance, for example a cost account, FreeAgent adds an equal credit entry to bring the account balance back to zero and adds a corresponding debit entry in the retained profit account.
2. Profit or loss for the accounting year is calculated
This means that the retained profit account (code 968 in FreeAgent) will have some credit and some debit entries. If the total of the credit entries in the retained profit account is higher than the total of the debit entries, the business has made a profit for the year. If the total of the debit entries in the retained profit account is higher than the credit entries, the business has made a loss for the year.
As a sole trader's business doesn’t have a separate legal identity of its own, the profit or loss made by a sole trader's business belongs to the individual rather than the business. Therefore, FreeAgent adds any capital introduced and drawings that have been recorded in the sole trader’s capital account (code 901 in FreeAgent) during the year to the retained profit account (code 968 in FreeAgent).