Sole trader income statement

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The income statement shows whether a business made a profit during a period, usually one year. It starts with sales, takes off what the goods sold cost, and then takes off the running costs. What is left is the profit, and in a sole trader’s business it belongs to the owner.

Example. A deli sells £186,400 of food in a year. The food cost it £97,400, and rent, wages and other costs were £58,850. Its profit for the year is £30,150.

Key words

Revenue: 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.

The statement, explained

Amira Khan, trading as Khan’s Deli 1

Income Statement

for the year ended 31 December 2025

	2025 £	2024 £
Revenue 2	186,400	171,200
Cost of sales 6
Opening inventory 3	6,200	5,400
Add: Purchases 4	98,300	91,000
	104,500	96,400
Less: Closing inventory 5	(7,100)	(6,200)
Cost of sales	(97,400)	(90,200)
Gross profit 7	89,000	81,000
Less: Expenses 8
Wages	32,500	30,100
Rent and rates	14,400	14,400
Electricity 9	4,650	3,900
Insurance 9	1,850	1,700
Depreciation of shop equipment 10	3,200	3,200
Advertising	1,200	800
Sundry expenses	1,050	900
Total expenses	(58,850)	(55,000)
Net profit for the year 11	30,150	26,000

What each numbered line means

Heading. It says whose accounts these are (Amira Khan, who owns the deli), which statement it is, and the period. “For the year ended” means the figures cover a whole year, from 1 January to 31 December 2025.
Revenue. The value of all sales in the year, not including VAT. The second column shows last year’s figure (the comparative), so you can see sales rose from £171,200 to £186,400.
Opening inventory. The stock held on 1 January 2025. It is always the same as last year’s closing inventory: £6,200 in the 2024 column appears again here.
Purchases. The cost of goods bought to sell during the year.
Closing inventory. The stock still held on 31 December 2025, counted and valued at cost (or less if it will sell for less). It is taken off because it has not been sold yet. It also appears as a current asset in the statement of financial position.
Cost of sales. The cost of the goods that were actually sold: opening inventory + purchases − closing inventory = £97,400.
Gross profit. Revenue minus cost of sales. It is the profit from buying and selling, before running costs. £89,000 ÷ £186,400 = a gross margin of 47.7%.
Expenses. The costs of running the business. They are the amounts that belong to this year, after adjusting for accruals and prepayments.
Adjusted expenses. Electricity includes £450 owed at the year end (an accrual). Insurance excludes £150 paid in advance for next year (a prepayment). So these figures are different from the amounts paid.
Depreciation. The part of the shop equipment’s cost charged for this year (10% of £32,000). No cash is paid for depreciation.
Net profit. Gross profit minus all the expenses. It belongs to the owner and is added to her capital in the statement of financial position. The money she took out for herself (drawings) is not an expense, so it does not appear here.

How to read it

Compare the two columns. Revenue rose by £15,200, which is 8.9%. Net profit rose by £4,150, which is 16.0%.
Work out the gross margin. This year £89,000 ÷ £186,400 = 47.7%. Last year £81,000 ÷ £171,200 = 47.3%. The deli is keeping a similar share of each sale after the cost of the food.
Look for expenses that changed a lot. Electricity rose from £3,900 to £4,650, which is 19%. That is faster than sales, so it is worth asking why.
Work out the net margin. £30,150 ÷ £186,400 = 16.2%, up from 15.2%. The business keeps more of each £1 of sales as profit.
Compare net profit with drawings (from the statement of financial position). Amira took out £26,500 of the £30,150 profit, so £3,650 stayed in the business.

Watch it explained

Press play to watch the animation, or step through it at your own pace with the arrows.

Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.

How to make it yourself

This is how the statement above was built from the trial balance.

Start with the trial balance at 31 December 2025

Account	Dr £	Cr £
Shop equipment at cost	32,000
Accumulated depreciation at 1 January 2025		12,800
Inventory at 1 January 2025	6,200
Purchases	98,300
Sales		186,400
Wages	32,500
Rent and rates	14,400
Electricity	4,200
Insurance	2,000
Advertising	1,200
Sundry expenses	1,050
Trade receivables	1,300
Cash at bank	10,500
Trade payables		5,600
Bank loan (repayable 2029)		8,000
Capital at 1 January 2025		17,350
Drawings	26,500
Totals	230,150	230,150

And the year-end adjustments

Closing inventory at 31 December 2025 was counted and valued at £7,100.
Electricity of £450 for December has not been billed yet (an accrual).
Insurance of £150 has been paid for January 2026 (a prepayment).
Depreciate shop equipment at 10% of cost per year.

Steps

Write the heading: the owner’s name and trading name, “Income Statement”, and “for the year ended 31 December 2025”.
Revenue: copy Sales from the trial balance: £186,400.
Cost of sales: opening inventory £6,200 (from the trial balance) + purchases £98,300 − closing inventory £7,100 (from the adjustments) = £97,400.
Gross profit: £186,400 − £97,400 = £89,000.
Expenses: copy each expense from the trial balance, then adjust:
- Electricity: £4,200 + £450 accrued = £4,650.
- Insurance: £2,000 − £150 prepaid = £1,850.
- Depreciation: 10% × £32,000 = £3,200 (a new line, not in the trial balance).
- Wages, rent and rates, advertising and sundry expenses are copied as they are.
Total the expenses: £58,850.
Net profit: £89,000 − £58,850 = £30,150. Double-underline it.
Check what you have not used. Equipment, accumulated depreciation, receivables, cash, payables, the loan, capital and drawings are not income or expenses. They go in the statement of financial position.

Fill it in yourself

Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.