How To Start A Sole Proprietorship 2023 Guide

If you’re on the fence between the two types of business formation check out the full Sole Proprietorship vs. LLC comparison. Because Cheesy Chuck’s tracks different types of expenses, we need to add the amounts to calculate total expenses. If you added correctly, you get total expenses for the month of June of $79,200. The final step to create the income statement is to determine the amount of net income or net loss for Cheesy Chuck’s. Since revenues ($85,000) are greater than expenses ($79,200), Cheesy Chuck’s has a net income of $5,800 for the month of June. A cash sale would be recorded in the financial statements under both the cash basis and accrual basis of accounting.

  • Also, the Equipment with a value of $12,500 in the financial information provided was purchased at the end of the first accounting period.
  • An income statement template helps you to identify areas of risk and patterns in profit and loss, and to make educated decisions around your budget.
  • A self-employed individual is someone who works for themselves and receives income from their business activities but doesn’t necessarily own a business.
  • Whatever income statement format you choose, the best way to produce an accurate financial statement of any kind is by using accounting software.

As noted above, there are certain distinctions between a sole proprietorship and a limited liability company and a partnership. If you want to start a one-owner business, the simplest and fastest way is through a sole proprietorship. It doesn’t require filing federal or state forms and has few regulatory burdens, making it an ideal way for self-employed people to start out.

Do sole proprietors pay income tax?

Accountants have an ethical duty to accurately report the financial results of their company and to ensure that the company’s annual reports communicate relevant information to stakeholders. If accountants and company management fail to do so, they may incur heavy penalties. An example of the two methods (cash versus accrual accounting) would probably help clarify their differences. Assume that a mechanic performs a tune-up on a client’s car on May 29, and the customer picks up her car and pays the mechanic $100 on June 2. If the mechanic were using the cash method, the revenue would be recognized on June 2, the date of payment, and any expenses would be recognized when paid.

  • Similarly, you may face a penalty for any IRS business form that you don’t file completely by the deadline.
  • While it is still better than Cheesy Chuck’s, Chuck is encouraged to learn that his store is performing at a more competitive level than he previously thought by comparing the dollar amounts of working capital.
  • If the desired name is free, articles of organization must be filed with the state office where the business will be based.
  • This is a vital step towards understanding the core strength of a company, and to assess the business performance.

It typically includes the company’s income, balance, and cash flow statements. Over a specified period, these statements describe revenue, expenses, assets, liabilities, and cash flows. Moreover, financial statements are useful for investors, creditors, and other stakeholders to make investment and lending decisions. Although owner distributions do not typically show up on profit and loss statements except as profit that can be distributed, balance sheets more accurately reflect the status of capital withdrawal by owners. For a corporation or partnership, a balance sheet reflects equity amounts that have accrued but have not been distributed.

Statement of Comprehensive Income

The primary goal of a business is to earn revenue by providing goods and services to customers in exchange for cash at that time or in the future. While selling other items for more than the value of the item does occur in business, these transactions are classified as gains, because these sales are infrequent and not the primary purpose of the business. Cheesy Chuck’s has only two assets, and one of the
assets, Equipment, is a noncurrent asset, so the value of current
assets is the cash amount of $6,200. Since this amount is over $0
(it is well over $0 in this case), Chuck is confident he has
nothing to worry about regarding the liquidity of his business. Many sole proprietors hesitate to claim the home office deduction because they’ve heard this deduction is a red flag and makes their return more susceptible to audit. If you run a home-based business, however, you are entitled to this deduction, and it can have a significant effect on your tax liability.

3: Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet

Accountants also take into account the building or equipment’s value when the item is worn out. The difference in these two values (the original cost and the ending value) will be allocated over a relevant period of time. As an example, assume a business purchased equipment for $18,000 and the equipment will be worth $2,000 after four years, giving an estimated decline in value (due to usage) of $16,000 ($18,000 − $2,000). The business will allocate $4,000 of the equipment cost over each of the four years ($18,000 minus $2,000 over four years).

What is a sole proprietorship?

A sole proprietorship tends to generate smaller amounts of revenue and incur lower levels of expenses than more complex types of organizations. Consequently, it can make sense to start off with the most minimal accounting record keeping that is based on the cash flows into and out of a bank account. This means maintaining a separate cash receipt journal and cash disbursements journal, and little else. This is considered a single entry accounting system, since it cannot be used to produce a balance sheet, only an income statement. Revenue1 is the value of goods and services the organization sold or provided to customers for a given period of time.


The details of accounting for the interests of corporations are covered in Corporation Accounting. At this stage, it’s important to point out that we are working with a sole proprietorship to help simplify the examples. We have addressed the owner’s value in the firm as capital or owner’s equity. It is important to understand that, in the long term, every activity of the business has a financial impact, and financial statements are a way that accountants report the activities of the business. Stakeholders must make many decisions, and the financial statements provide information that is helpful in the decision-making process.

Assume that as part of your summer job with Cheesy Chuck’s, the owner—you guessed it, Chuck—has asked you to take over for a former employee who graduated college and will be taking an accounting job in New York City. In addition to your duties involving making and selling popcorn at Cheesy Chuck’s, part of your responsibility will be doing the accounting for the business. The owner, Chuck, heard that you are studying accounting and could really use the help, because he spends most of his time developing new popcorn flavors. If the accrual method were used, the mechanic would recognize the revenue and any related expenses on May 29, the day the work was completed. The accrual method will be the basis for your studies here (except for our coverage of the cash flow statement in Statement of Cash Flows).

Resources for Your Growing Business

For example, if you had a net profit of $50,000 from your sole proprietorship, you’ll pay $7,065, which is 15.3% of $46,175 ($50,000 x 92.35%). Sole proprietorships—run by freelancers, consultants or other independent contractors—typically have simple taxes compared to other business structures. However, there are specific tax guidelines sole proprietors must follow come tax season.

Tax advisors can help proprietors estimate taxes so they can set aside enough of the profits to make mandatory government payments[2]. Along with self-employment, federal and state income taxes, if you hire employees for your business, you will pay employment taxes. Schedule some time to talk with the business owner, and find out how he or she uses financial information to make decisions.