Sole-traders have no statute to require the preparation of financial statements. Tax and Vat legislation requires retention of accounting records and supporting documentation.
Financial statements will be predominantly used for disclosure to the banks, creditors and SARS for financing and tax compliancy. The needs of the bank and SARS are rather diverse; however, both users could request additional information and have access to supporting documents.
A sole trader does not have shareholders, directors, members, trustees, or beneficiaries. The profits of the sole trader are his own and taxed as such. The sole trader will therefore not have retained earnings, undistributed profits, or share capital. The sole trader cannot have a loan agreement with himself as it requires at least two parties to have an agreement. This means that there is not much need for general purpose financial statements, and the users of the financial statements would be limited!
The Income Tax Act does not require financial statements from a sole trader, and SARS generally will not require such for disclosure of income and expenses. Any format which summarises the supporting documentation of deductions and allowances for tax purposes will be accepted.
In the absence of an accounting officer or auditor, banks place very little reliance on financial statements.
If the sole trader is registered for VAT there is an increased accounting requirement and supporting documents must be retained for many years, which is essential for income tax and VAT audits.