Income Statement (Cambridge (CIE) IGCSE Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Income Statement for Sole Traders
What is the purpose of an income statement for a sole trader?
It is a statement prepared for a trading period to show the gross profit and the profit for the year
A financial year does not necessarily follow the calendar year from January to December
For example, if a business commences trading on 1 July 2023 then the first financial year would run from 1 July 2023 to 30 June 2024
The income statement consists of two parts
The trading section shows the calculation of the gross profit
The profit and loss section shows the calculation of the profit for the year
The income statement is part of the double entry system of book-keeping
Debit entries to the income statement decrease profit
These are usually the expenses
Credit entries to the income statement increase profit
These are usually the sources of income
An income statement can sometimes be created like an account with a debit side and a credit side
This is called the horizontal format
The balancing figure will be the profit or loss
Profit if it is on the debit side
Loss if it is on the credit side
However, most businesses produce income statements as a statement using the vertical format
How do I complete the trading section of an income statement?
STEP 1
Calculate the total revenue and put the value in the far right columnRevenue
Less sales returns
STEP 2
Calculate the cost of sales and put the value in the far right columnOpening inventory
Add net purchases
Purchases
Less purchases returns
Less goods for own use
Add carriage inwards
Less closing inventory
STEP 3
Calculate the gross profit and put the value in the far right columnRevenue
Less cost of sales
Examiner Tips and Tricks
In general, you move one column to the left if a calculation is needed that involves more than one item and a subtraction.
For example:
cost of sales involves a calculation and it is subtracted from the sales
therefore the calculation is done in the middle column
It is normally only the calculation for the net purchases that is displayed in the far left column.
How do I complete the profit and loss section of an income statement?
STEP 1
Put the gross profit in the far right columnSTEP 2
Total up any other incomes which increase the profit for the year such asDiscount received
Other income received
Recovery of irrecoverable debts
Profit on sale of non-current asset
STEP 3
Total up any other expenses which decrease the profit for the year such asDiscount allowed
Carriage outwards
Irrecoverable debts written off
Depreciation of non-current assets
Loss on sale of non-current assets
Sundry expenses
Other expenses
STEP 4
Calculate the profit or loss for the yearGross profit
Add other income
Less other expenses
If the final value is a negative
Put brackets around the value
This means it is a loss not a profit
E.g. (500) represents a loss of $500
Examiner Tips and Tricks
The items for the other income can be put in the far right column as they are added to the gross profit. However, if you prefer you can put them in the middle column, find the total and put that in the far right column. Whereas the expenses need to go in the middle column because the total is subtracted from the previous figure in the far right column.
What is operating profit?
Operating profit is also known as profit from operations
It is the profit for the year before subtracting the loan interest
Some businesses show this in the profit and loss section of their income statement
If a business does not have finance costs then profit from operations is the same as profit for the year
How is the income statement of a trading business created?
The income statement of a trading business contains both the
Trading section
Profit and loss section
The gross profit links the two sections together
You do not need to state this value twice
Examiner Tips and Tricks
The exam might give you the information in a trial balance along with additional information underneath. Identify items from the trial balance that would appear on the income statement. You might find it helpful to annotate with IS to differentiate from those which would appear on the statement of financial position.
Worked Example
The following trial balance has been extracted by the book-keeper of Ali Baba, a wholesaler of school supplies, at 31 December 2023.
| Debit $ | Credit $ |
Trade receivables | 25 325 |
|
Trade payables |
| 20 684 |
Capital |
| 40 000 |
Bank |
| 2 083 |
Rent and rates | 11 862 |
|
Electricity | 3 054 |
|
Telephone | 2 695 |
|
Salaries | 56 891 |
|
Vehicles | 23 250 |
|
Office equipment | 8 500 |
|
Vehicle expenses | 13 855 |
|
Drawings | 16 275 |
|
Discount allowed | 478 |
|
Discount received |
| 591 |
Purchases | 139 960 |
|
Revenue (Sales) |
| 258 258 |
Inventory at 1 January 2023 | 19 471 |
|
| 321 616 | 321 616 |
Additional information:
Inventory at 31 December 2023 is valued at $15 075
The vehicles and office equipment were purchased during the year and Ali Baba does not charge depreciation in the year of purchase
Prepare an income statement for Ali Baba for the year ended 31 December 2023.
Answer
Identify which items appear on the income statement by labelling them as IS. Add an extra row for the closing inventory.
| Debit $ | Credit $ | Income statement? |
Trade receivables | 25 325 |
| |
Trade payables |
| 20 684 | |
Capital |
| 40 000 | |
Bank |
| 2 083 | |
Rent and rates | 11 862 |
| IS |
Electricity | 3 054 |
| IS |
Telephone | 2 695 |
| IS |
Salaries | 56 891 |
| IS |
Vehicles | 23 250 |
| |
Office equipment | 8 500 |
| |
Vehicle expenses | 13 855 |
| IS |
Drawings | 16 275 |
| |
Discount allowed | 478 |
| IS |
Discount received |
| 591 | IS |
Purchases | 139 960 |
| IS |
Revenue (Sales) |
| 258 258 | IS |
Inventory at 1 January 2023 | 19 471 |
| IS |
| 321 616 | 321 616 | |
Inventory at 31 December 2023 | 15 075 | IS |
Complete the income statement using the formula to help:
Complete the trading section to find the gross profit
Revenue (sales)
Minus cost of sales
Opening inventory
Plus purchases
Minus closing inventory
Complete the profit and loss section to find the profit for the year
Gross profit
Plus other income
Minus expenses
Ali Baba Income Statement for the year ended 31 December 2023 | ||
$ | $ | |
Revenue |
| 258 258 |
Less: Cost of sales |
|
|
Opening inventory | 19 471 |
|
Purchases | 139 960 |
|
| 159 431 |
|
Less: Closing inventory | 15 075 | 144 356 |
Gross Profit |
| 113 902 |
Add: Other income |
|
|
Discount received |
| 591 |
|
| 114 493 |
Less: Expenses |
|
|
Discount allowed | 478 |
|
Rent and rates | 11 862 |
|
Electricity | 3 054 |
|
Telephone | 2 695 |
|
Salaries | 56 891 |
|
Vehicle expenses | 13 855 | 88 835 |
Profit for the year |
| 25 658 |
Income Statement for Service Businesses
How is the income statement of a service business created?
The income statement of a service business does not have a trading section
Because they do not buy or sell goods
Therefore there will not be a gross profit
The income statement for a service business only contains the profit and loss section
Therefore the income statement will start with the income received
How do I complete an income statement for a service business?
STEP 1
Total up any income such as:Commission
Rent
Other income received
STEP 2
Total up any expenses such as:Wages
General expenses
Operating expenses
STEP 3
Calculate the profit or loss for the yearThe total income minus the total expenses
Worked Example
Sherwin operates a taxi service and has provided the following information at the end of the financial year on 31 October 2023. Prepare the income statement for Sherwin’s Taxi Service for that period.
$ | |
General expenses | 9 250 |
Insurance | 3 200 |
Printing and stationery | 1 560 |
Income from taxi fares | 82 250 |
Motor expenses | 15 750 |
Loan interest | 1 200 |
Answer
Start with the income
Subtract the expenses
Calculate the profit for the year
Sherwin’s Taxi Service Income Statement for the year ended 31 October 2023 | ||
$ | $ | |
Income from taxi fares | 85 250 | |
Less: Expenses | ||
General expenses | 9 250 | |
Insurance | 3 200 | |
Printing and stationery | 1 560 | |
Motor expenses | 15 750 | |
Loan interest | 1 200 | 30 960 |
Profit for the year | 54 290 |
You can also state the profit from operations.
Start with the income
Subtract the operating expenses
Calculate the profit from operations
Subtract the loan interest
Calculate the profit for the year
Sherwin’s Taxi Service Income Statement for the year ended 31 October 2023 | ||
$ | $ | |
Income from taxi fares | 85 250 | |
Less: Expenses | ||
General expenses | 9 250 | |
Insurance | 3 200 | |
Printing and stationery | 1 560 | |
Motor expenses | 15 750 | 29 760 |
Profit from operations | 55 490 | |
Less: Loan interest | 1 200 | |
Profit for the year | 54 290 |
Last updated:
You've read 0 of your 5 free revision notes this week
Sign up now. It’s free!
Did this page help you?