Income statement (sole trader) format

The standard format

1. Revenue (less sales returns)
2. Cost of sales (opening inventory + purchases − closing inventory)
3. Gross profit
4. Add: other income
5. Less: expenses
6. Profit for the year

Filled example

Notes

• List expenses individually, then total them.
• Drawings never appear here. They reduce capital instead.
• Adjust each expense for accruals and prepayments before entering it.

Building and reading this format

The income statement answers two questions in order. First, how much profit did the business make from buying and selling goods? Second, how much was left after the running costs?

So the statement has two stages. The top part gives gross profit. The bottom part gives profit for the year.

Start with revenue, which is sales less any sales returns (returns inwards). Under it, work out cost of sales: opening inventory, plus purchases (less purchases returns, plus carriage inwards), less closing inventory.

Carriage inwards is the cost of delivering goods to the business. It belongs in cost of sales, and putting it among expenses is a common slip.

Revenue minus cost of sales gives gross profit. Add any other income, such as commission received.

Then list every expense, total them, and subtract the total. The result is profit for the year, which later joins the capital account in the statement of financial position.

Each subtotal tells the owner something. Gross profit shows whether the mark-up on goods is healthy. Expenses show how well the running costs are controlled.

Take revenue of RM90,000, cost of sales of RM54,000 and expenses of RM22,000. Gross profit is RM36,000, a 40% margin.

Profit for the year is RM14,000. The final figure alone hides that the pressure comes from overheads, not from trading.

Marks are lost for a few repeat mistakes. Carriage outwards is a selling cost, so it goes with expenses, not in cost of sales. Forgetting closing inventory overstates cost of sales and understates profit.

Leaving out the gross profit line stops the marker seeing the trading result. Writing "net profit" or "sales" when the board expects "profit for the year" and "revenue" also costs presentation marks. Deduct returns from the sales or purchases they relate to, not as separate expenses.

For layout, head the statement with the business name and "for the year ended" plus the date. Use two money columns, with workings in the inner column. Underline each subtotal once and the final profit twice.

If your statements keep losing marks on layout, one of our teachers can check your past-paper answers line by line and show you where the marks go. Book a trial class

Related how-to

• How to prepare an income statement for a sole trader

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.