## Cash Flow Statement for a Sole Proprietorship

A sole proprietorship has no share capital and no dividend. However, the owner withdraws cash (drawings) — this is the equivalent of dividends paid and is classified as a Financing Activity outflow.

### Key structural differences vs. a company

Item	Company	Sole Proprietorship
Return to owner	Dividend paid	Drawings by proprietor
Owner's funds	Share capital + Reserves	Proprietor's Capital A/c
Borrowings	Debentures, bank loans	Proprietor's loan, bank loans
Classification	Financing	Financing

### Proprietor's Capital Account (T-account)

```

Proprietor's Capital A/c

Drawings ××× | Opening balance ×××

Closing balance ××× | Net Profit (P&L) ×××

```

Net Profit from this account = PBT used in Operating Activities.
Drawings = outflow under Financing Activities.

### Proprietor's Loan / Related-party Loan

Treated exactly like a bank loan:

Loan received → Financing inflow
Loan repaid → Financing outflow

### Fixed Assets — Net Block T-account

```

Net Block A/c

Opening balance ××× | CIB (asset sales) ×××

Purchases (CIB) ××× | Loss on sale (P&L) ×××

| Depreciation (P&L) ×××

| Closing balance ×××

```

Note: If an asset is sold at a loss, the journal entry is:

```

CIB A/c (sale proceeds) Dr ×××

P&L — Loss on sale Dr ×××

To Asset A/c ×××

```

So CIB (proceeds) = Book value − Loss

Worked example

### Example 1

Illustration — Zen (Sole Proprietor)

Given:

PBT = ₹3,60,000; Loss on sale of machine = ₹16,000; Depreciation = ₹1,44,000
Increase in Inventory = ₹32,000; Increase in Inventory (second item) = ₹80,000; Increase in TR = ₹1,60,000
Drawings by Zen = ₹1,36,000; Loan repaid = ₹12,00,000; Loan taken = ₹80,000

Proprietor's Capital A/c:

```

Drawings by Zen 1,36,000 | Opening balance 10,00,000

Closing balance 12,24,000 | Net Profit (PBT) 3,60,000

--------- ----------

13,60,000 13,60,000

```

A. CF from Operating Activities (Indirect Method):

```

PBT 3,60,000

Add: Loss on sale of machine 16,000

Add: Depreciation 1,44,000

Increase in Inventory (32,000)

Increase in Inventory (2nd) (80,000)

Increase in Trade Receivables (1,60,000)

CF from Operating Activities 4,72,000 (approx, before tax)

```

B. CF from Investing Activities:

```

Sale proceeds of machine (Net Block ledger balancing figure)

Less: Purchase of Land / other assets

```

C. CF from Financing Activities:

```

Loan taken +80,000

Loan repaid (12,00,000)

Drawings by Zen (like dividend) (1,36,000)

Net CF from Financing ×××

```

⚠️ Common exam mistakes

Classifying drawings as an operating expense instead of a Financing Activity outflow.
Double-counting net profit — it is already included in the change in Capital A/c; do not add it again separately.
Confusing proprietor's personal loan to the business (Financing Activity) with trade payables (Operating Activity).
Omitting to add back loss on sale of fixed assets to PBT in Operating Activities (since the cash proceeds go to Investing Activities).

Reference:

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