Income statement · Trial Balance

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What it is: A statement that shows whether the business made a profit or a loss over one year.

How it is laid out: Start with sales. Take away cost of sales (what the goods sold cost to buy). The answer is gross profit. Then take away the running costs, such as rent and wages. The answer is net profit.

Important: It covers a period of time, such as “for the year ended 31 December”.

Example. A shop sells goods for £50,000. Those goods cost the shop £30,000. Gross profit = £50,000 − £30,000 = £20,000. Rent and wages are £12,000. Net profit = £20,000 − £12,000 = £8,000.

Key words

Revenue (sales): The money a business earns from selling goods or services in its normal trading. Also called sales or turnover.Example: A café that sells £20,000 of coffee in a year has revenue of £20,000.
Cost of sales: The cost of the goods that were actually sold during the period. It is calculated as opening stock + purchases − closing stock.Example: Opening stock £1,500 + purchases £9,000 − closing stock £2,000 = cost of sales £8,500.
Gross profit: Sales minus the cost of the goods sold, before any other expenses are taken off.Example: Sales £20,000 − cost of sales £8,500 = gross profit £11,500.
Net profit: What is left from sales after taking off the cost of sales and all the other expenses, such as rent and wages.Example: Gross profit £11,500 − expenses £6,900 = net profit £4,600.
Inventory: Goods the business holds to sell, and materials it will use to make goods. Also called stock.Example: A coffee roaster’s unsold bags of coffee beans.

Learn

The income statement shows the profit made over a period of time. Its heading always says for the year ended (a period). Under IAS 1, a company calls it the statement of profit or loss.

Layout, from top to bottom

Revenue: sales, minus any goods customers returned.
Cost of sales: what the goods that were sold cost the business. If you are given inventory figures, work it out like this:

Cost of sales = Opening inventory + Purchases − Closing inventory

Example: Opening inventory £4,000 + Purchases £30,000 − Closing inventory £5,000 = Cost of sales £29,000.

Gross profit = Revenue − Cost of sales. This is the profit from buying and selling goods.
Take away the expenses: rent, wages, depreciation, delivery costs, office costs.
For a sole trader, the answer is net profit. For a company, the lines are: operating profit, then take away finance costs (interest), profit before tax, then take away tax, profit for the year.

How to set it out

Use two money columns. Put the workings in the left column and the totals in the right column.
Put amounts you take away in brackets, for example (5,000).
Draw a single line above each subtotal. Draw a double line under the final profit.

Never include these: drawings, money the owner puts in, loan repayments, or the price paid for long-term assets. They are not income or expenses. The depreciation on long-term assets is included.

Watch it explained

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Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. They may use slightly different terms, for example “owner’s equity” instead of “capital”.

Worked example

Marsh Lane Cycles Ltd

Statement of Profit or Loss

for the year ended 31 December 2025

	£	£
Revenue		80,000
Cost of sales
Opening inventory	5,000
Add: Purchases	42,000
	47,000
Less: Closing inventory	(7,000)
Cost of sales		(40,000)
Gross profit		40,000
Distribution costs		(9,000)
Administrative expenses		(15,000)
Operating profit		16,000
Finance costs		(1,000)
Profit before tax		15,000
Income tax expense		(3,000)
Profit for the year		12,000

Practice questions

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