A question on balance sheets (sole trader)

[shenfrey]

So for my assignment at collage I need to talk about the value of a profit and loss account for a sole trader as well as a balance sheet. Now I understand the value of a P&L account but I am really confused on why a balance sheet is important for a sole trader, aside from the obvious goal of looking at years worth of trading and seeing how much money is coming and going out of the business.

If anyone could give me any advice I would really be grateful, I have scoured google but I just can't seem to find anything on this. I am also from the UK as iv been told that we do balance sheets slightly differently to other countries, wether this has any affect on the advice you give me I don't know, just making you aware!

Thanks for the help in advance guys : )

 

[Tomorrow]

Now I understand the value of a P&L account but I am really confused on why a balance sheet is important for a sole trader, aside from the obvious goal of looking at years worth of trading and seeing how much money is coming and going out of the business.

A balance sheet doesn't show you how much money is coming and going; that would be a cash flow statement, which is a completely different thing.

The balance sheet is simply a breakdown of A=D+E. It shows you how much of your assets are paid for versus not paid for. It's a snapshot in time, so yes, looking at years' worth of balance sheets would possibly show you some sort of trend if it existed, but the trend it would show you would not be how much money is going in and out. It would show you (1) the assets you've acquired (or lost); (2) the amount of debt you're carrying, and (3) the amount of equity you have in your assets. From this, your debt-to-equity ratio should tell you quite a bit as well, particularly how this number trends over the years.