An income statement for a sole trader works down in three blocks: revenue less cost of sales gives gross profit, other income is added, and expenses are deducted to reach profit for the year. In an exam you are usually given a list of figures with adjustments already identified, and you have to place every line correctly.
This is the point where accruals and prepayments, depreciation and receivables adjustments all land on one page. It is the first lesson in sole-trader statements.
What belongs in each block?
The statement has one job: to show the profit that belongs to the year. Every line is either income or a cost of earning that income.
- Revenue: sales for the year, less returns inwards if given.
- Cost of sales: opening inventory + purchases + carriage inwards − returns outwards − closing inventory.
- Other income: items such as discount received or commission received, added after gross profit.
- Expenses: wages, rent, electricity, depreciation, irrecoverable debts and the change in the allowance, each adjusted to the year.
How do you build it step by step?
- Write the heading: business name, “Income statement”, “for the year ended” and the date.
- Calculate cost of sales and subtract it from revenue to get gross profit.
- Add other income to gross profit.
- Adjust each expense to the year: remove prepayments, add accruals, use the depreciation charge, not the accumulated total.
- Total the expenses, subtract them, and label the result profit for the year.
Worked example
Hasnah Home Supplies has a year end of 31 December 2025. The adjusted data (all in RM) is below.
| Item | RM |
|---|---|
| Revenue | 96,000 |
| Opening inventory | 8,000 |
| Purchases | 52,000 |
| Carriage inwards | 1,000 |
| Returns outwards | 2,000 |
| Closing inventory | 9,000 |
| Wages | 18,400 |
| Rent paid (1,200 of it is prepaid) | 7,200 |
| Electricity paid (300 still owing) | 2,000 |
| Depreciation of shop equipment | 2,500 |
| Irrecoverable debts written off | 500 |
| Increase in allowance for irrecoverable debts | 150 |
| Discount received | 850 |
Step 1, cost of sales: purchases 52,000 + carriage inwards 1,000 − returns outwards 2,000 = 51,000. Add opening inventory 8,000 to get 59,000, then subtract closing inventory 9,000. Cost of sales is 50,000.
Step 2, gross profit: 96,000 − 50,000 = 46,000.
Step 3, adjust the expenses: rent is 7,200 − 1,200 = 6,000. Electricity is 2,000 + 300 = 2,300. Irrecoverable debts are 500 + 150 = 650.
Step 4, assemble the statement.
| Hasnah Home Supplies: Income statement for the year ended 31 December 2025 | RM | RM |
|---|---|---|
| Revenue | 96,000 | |
| Cost of sales (50,000) | (50,000) | |
| Gross profit | 46,000 | |
| Add: Discount received | 850 | |
| 46,850 | ||
| Wages | 18,400 | |
| Rent | 6,000 | |
| Electricity | 2,300 | |
| Depreciation of shop equipment | 2,500 | |
| Irrecoverable debts | 650 | |
| Total expenses | (29,850) | |
| Profit for the year | 17,000 |
Check: expenses 18,400 + 6,000 + 2,300 + 2,500 + 650 = 29,850, and 46,850 − 29,850 = 17,000. The same profit of RM17,000 feeds the statement of financial position in the next lesson.
What mistake catches students here?
A common slip is to copy the cash paid into the statement as the expense.
Mistaken working: rent 7,200 and electricity 2,000 are used as they were paid. Expenses become 30,750 and profit becomes 16,100.
The prepayment of 1,200 belongs to next year, and the 300 owing belongs to this year.
The correction is to ask of every expense: “which period does this cost belong to?” Rent rises or falls from the cash figure only by the adjustment. Here the two errors partly cancel (+1,200 and −300), so profit is 900 too low: 17,000 − 900 = 16,100.
Check yourself
Try these on paper first, then open each answer.
1. Opening inventory is RM4,500, purchases RM30,000, carriage inwards RM600, returns outwards RM1,000 and closing inventory RM5,100. Find cost of sales.
Show answer
4,500 + 30,000 + 600 − 1,000 − 5,100 = RM29,000.
Check: 34,500 + 600 = 35,100; 35,100 − 1,000 = 34,100; 34,100 − 5,100 = 29,000.
2. Revenue is RM41,000 and cost of sales is RM29,000 (from question 1). Discount received is RM300 and expenses total RM8,200. Find profit for the year.
Show answer
Gross profit = 41,000 − 29,000 = 12,000. Add discount received: 12,300. Subtract expenses: 12,300 − 8,200 = RM4,100.
3. Rent paid is RM5,400 and includes RM600 paid in advance. Water paid is RM1,100 and RM150 is owing. What expense does each line show?
Show answer
Rent: 5,400 − 600 = RM4,800. Water: 1,100 + 150 = RM1,250.
Where does this lead next?
With the profit found, the next job is to show what the business owns and owes at the year end in a statement of financial position. When you want to test the whole module, try the mixed practice set, and use the double-entry and ledger trainer to rebuild any adjustment you are unsure of.
Some students can follow a model answer but lose marks when the layout is blank. Our teachers can work on that in online one-to-one Accounting tuition.