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Income statement of a sole trader
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The income statement shows whether a business made a profit or a loss over the year.
Cost of sales and gross profit
Revenue (sales less sales returns)
less cost of sales = gross profit
Cost of sales = opening inventory + purchases (less purchases returns, plus carriage inwards) − closing inventory
less cost of sales = gross profit
Cost of sales = opening inventory + purchases (less purchases returns, plus carriage inwards) − closing inventory
Profit for the year
Gross profit
add other income (such as discount received, rent received)
less expenses (such as wages, rent, insurance, carriage outwards, depreciation, irrecoverable debts)
= profit for the year (or loss).
add other income (such as discount received, rent received)
less expenses (such as wages, rent, insurance, carriage outwards, depreciation, irrecoverable debts)
= profit for the year (or loss).
An example
Revenue £80 000, opening inventory £5000, purchases £50 000, closing inventory £7000. Find the gross profit.
- Cost of sales = 5000 + 50 000 − 7000 = £48 000
- Gross profit = 80 000 − 48 000
Answer: £32 000
Cost of sales = opening inventory + net purchases (+ carriage inwards) − closing inventory. Gross profit = revenue − cost of sales. Profit for the year = gross profit + other income − expenses.
The interactive lesson includes the diagrams for this topic.
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