Income Statement (Cambridge (CIE) O Level Accounting)

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 column

  • Revenue

  • Less sales returns

• STEP 2
  Calculate the cost of sales and put the value in the far right column

  • Opening 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 column

  • Revenue

  • Less cost of sales

How do I complete the profit and loss section of an income statement?

• STEP 1
  Put the gross profit in the far right column

• STEP 2
  Total up any other incomes which increase the profit for the year such as

  • Discount 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 as

  • Discount 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 year

  • Gross 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

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

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 year

  • The total income minus the total expenses