IGCSE Income Statement
We will learn how to prepare an Income Statement for a sole proprietor of a trading business. Students will learn how to calculate cost of sales, gross profit, and how income and expenses are recorded to determine the business’s profit or loss for an accounting year.
Related Lessons:
Calculating Cost of Sales
To calculate the cost of the goods sold for the accounting period, we take
Inventory at the beginning of the accounting year
Plus
Inventory purchased during the year
Cost of delivery which is recorded as Carriage Inwards
Minus
Purchases returned during the year
Goods withdrawn by the owner for his/her personal use
Unsold inventory at the end of the year
Calculating Gross Profit and Profit for the Year
Gross profit is profit earned through the buying and reselling of goods and is calculated as follows:
Sales revenue – sales returns = net sales revenue
Net sales revenue – cost of sales = gross profit or loss
Net sales revenue > Cost of sales = gross profit
Net sales revenue < Cost of sales = gross loss
Profit for the year is the amount earned after adding other income to the gross profit and deducting all business expenses for the accounting period.
To calculate profit for the year, we add gross profit and other income earned and minus all operating expenses from it.
Where gross profit and other income is more than expenses, the business made a profit.
When gross profit and other income is less than expenses, the business made a loss.
Preparing A Statement of Financial Performance
Steps to preparing a trading business statement of financial performance of a sole proprietor:
We start by stating the business name and the date that this statement represents in the header. The date will include the day, month and year.
Next, we prepare the first section of the statement where we calculate the net sales revenue, cost of sales and gross profit or loss.
In the second section, we list down all other incomes earned by the business.
Examples of such income include discount received, commission received, interest received
In the final section, we list down all the expenses incurred by the business.
Examples of expenses include discount allowed, rent expense, utilities expense, interest expense, stationery expense, wages & salaries expenses
With the above information, we calculate our profit or loss for the year.