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SingaporeAccountingSyllabus dot point

How do we work out the profit a sole trader made over a year?

Prepare the income statement of a sole trader, showing gross profit and profit for the year

A simple answer to the N(A)-Level Principles of Accounts outcome on the income statement. The cost of sales, gross profit, expenses and profit for the year, and how to lay the statement out for a sole trader.

Generated by Claude Opus 4.810 min answer

Reviewed by: AI editorial process; not yet individually human-reviewed

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  1. What this dot point is asking
  2. The answer
  3. Examples in context
  4. Try this

What this dot point is asking

SEAB wants you to prepare the income statement of a sole trader, working down to gross profit and then to profit for the year. This is one of the two main statements and a frequent Paper 2 task. The central insight is that the statement has two stages: first trading (sales less the cost of the goods sold) to get gross profit, then deducting running expenses (and adding other income) to get profit for the year.

The answer

The two stages

  1. Trading section: gross profit == sales −- cost of sales.
  2. Profit section: profit for the year == gross profit ++ other income −- expenses.

Working out cost of sales

The cost of sales is the cost of the goods actually sold, not just goods bought:

Cost of sales=opening inventory+purchases−closing inventory\text{Cost of sales} = \text{opening inventory} + \text{purchases} - \text{closing inventory}

Add what you started with and bought, then subtract what is left unsold. (Carriage inwards, the cost of bringing goods in, is added to purchases; returns outwards are subtracted.)

Gross profit

Gross profit=sales−cost of sales\text{Gross profit} = \text{sales} - \text{cost of sales}

This is the profit from trading alone, before running costs.

Profit for the year

From gross profit, add any other income (such as rent received or discount received), then subtract the running expenses (wages, rent, electricity, depreciation, irrecoverable debts). The result is the profit for the year, the sole trader's reward, which is added to capital.

Examples in context

Example 1. Why closing inventory matters. A shop buys \40,000ofgoodsbutonlysellssome,leaving of goods but only sells some, leaving \8,0008,000 unsold at the year end. If the whole \40,000weretreatedascostofsales,profitwouldbefartoolow.Subtractingthe were treated as cost of sales, profit would be far too low. Subtracting the \8,0008,000 closing inventory charges only the goods actually sold, which is why the inventory count at the year end directly affects the reported profit.

Example 2. Other income lifting profit. A sole trader sublets part of the shop and earns \3,000$ rent received. This is not trading income, so it is added after gross profit, raising profit for the year without touching gross profit. Keeping it separate shows users that the extra profit came from renting space, not from the core business of selling goods.

Try this

Q1. State the formula for cost of sales. [2 marks]

  • Cue. Opening inventory ++ purchases −- closing inventory.

Q2. Sales are \40,000andcostofsalesis and cost of sales is \26,00026,000. Find gross profit. [1 mark]

  • Cue. 40\,000 - 26\,000 = \14,000$.

Q3. Explain why drawings are not shown in the income statement. [2 marks]

  • Cue. Drawings are the owner taking money out, which reduces capital, not an expense of running the business, so they belong in the statement of financial position.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original6 marksFrom these figures, calculate the cost of sales and the gross profit: opening inventory \3\,000;purchases; purchases \20 00020\,000; closing inventory \4\,000;sales; sales \30 00030\,000.
Show worked answer →

Cost of sales == opening inventory ++ purchases −- closing inventory = 3\,000 + 20\,000 - 4\,000 = \19,000$.

Gross profit == sales −- cost of sales = 30\,000 - 19\,000 = \11,000$.

What markers reward: the cost of sales formula applied correctly (add opening inventory and purchases, subtract closing inventory) to get \19,000,andgrossprofitof, and gross profit of \11 00011\,000.

Original6 marksA sole trader has gross profit of \15\,000,rent, rent \4 0004\,000, wages \6\,000andrentreceived and rent received \1 0001\,000. Calculate the profit for the year and show the order in which the items appear.
Show worked answer →

Start with gross profit, add other income, then subtract expenses:

  • Gross profit \15,000$
  • Add rent received \1,000,giving, giving \16 00016\,000
  • Less expenses: rent \4,000andwages and wages \6 0006\,000, total \10,000$
  • Profit for the year = 16\,000 - 10\,000 = \6,000$.

What markers reward: adding other income (rent received) to gross profit before deducting expenses, the correct order, and the profit for the year of \6,000$.

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