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SingaporeAccountingSyllabus dot point

How is a sole proprietor's income statement built up from gross profit to profit for the year?

Prepare the income statement of a sole proprietor, distinguishing gross profit from profit for the year

A focused answer to the O-Level Principles of Accounts outcome on the income statement. The cost of sales and gross profit, adding other income, deducting expenses, and arriving at the profit for the year.

Generated by Claude Opus 4.89 min answer

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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 a sole proprietor's income statement, distinguishing gross profit from profit for the year. The central insight is that the statement is built in two stages: first the trading section finds gross profit (net sales less cost of sales), then other income is added and the remaining expenses deducted to give the profit for the year.

The answer

The two sections

Section Purpose Key result
Trading section Compare sales with the cost of goods sold Gross profit
Profit and loss section Add other income, deduct expenses Profit for the year

Net sales and cost of sales

Start with net sales (sales less sales returns). Then build the cost of sales:

Cost of sales=Opening inventory+Purchases+Carriage inwards−Closing inventory\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} + \text{Carriage inwards} - \text{Closing inventory}

Carriage inwards is added because it is part of getting goods ready to sell; purchases returns (if any) are deducted from purchases.

Gross profit

Gross profit=Net sales−Cost of sales\text{Gross profit} = \text{Net sales} - \text{Cost of sales}

Gross profit measures the success of the trading activity: how much the business made on the goods it sold before other costs.

Profit for the year

Add other income (discount received, rent received, commission), then deduct the other expenses of running the business (rent, wages, insurance, carriage outwards, depreciation, irrecoverable debts):

Profit for the year=Gross profit+Other income−Other expenses\text{Profit for the year} = \text{Gross profit} + \text{Other income} - \text{Other expenses}

The profit for the year is added to the owner's capital in the statement of financial position.

Examples in context

Example 1. Trading well but spending too much. A shop has a healthy gross profit of \60,000but,afterheavyrentandwages,aprofitfortheyearofonly but, after heavy rent and wages, a profit for the year of only \5,0005,000. Splitting the statement into two stages shows the owner the trading is strong; the problem is the running costs, which is where to act.

Example 2. Why carriage is split. A wholesaler pays to bring stock in and to deliver to customers. The inward carriage raises cost of sales (lowering gross profit), while the outward carriage sits below gross profit as a selling expense. This keeps gross profit a clean measure of the margin on goods, separate from the cost of delivering them.

Try this

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

  • Cue. Cost of sales == opening inventory ++ net purchases ++ carriage inwards −- closing inventory.

Q2. Net sales are \80,000andcostofsalesis and cost of sales is \52,00052,000. State the gross profit. [1 mark]

  • Cue. Gross profit = 80\,000 - 52\,000 = \28,000$.

Q3. Gross profit is \30,000,otherincome, other income \2,0002,000, and expenses \19,000$. State the profit for the year. [2 marks]

  • Cue. Profit for the year = 30\,000 + 2\,000 - 19\,000 = \13,000$.

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.

Original9 marksFrom the following for the year, prepare the income statement: sales \90\,000;salesreturns; sales returns \2 0002\,000; opening inventory \8\,000;purchases; purchases \50 00050\,000; carriage inwards \1\,000;closinginventory; closing inventory \10 00010\,000; rent \6\,000;wages; wages \14 00014\,000; discount received \500$.
Show worked answer →

| Income statement for the year | $\

| $\
|
| --- | --- | --- |
| Sales | | 90,000 |
| Less sales returns | | (2,000) |
| Net sales | | 88,000 |
| Opening inventory | 8,000 | |
| Add purchases | 50,000 | |
| Add carriage inwards | 1,000 | |
| | 59,000 | |
| Less closing inventory | (10,000) | |
| Cost of sales | | (49,000) |
| Gross profit | | 39,000 |
| Add discount received | | 500 |
| | | 39,500 |
| Less rent | 6,000 | |
| Less wages | 14,000 | |
| Total expenses | | (20,000) |
| Profit for the year | | 19,500 |

Cost of sales = 8\,000 + 50\,000 + 1\,000 - 10\,000 = \49,000.Grossprofit. Gross profit = 88,000 - 49,000 = \39 00039\,000. Profit for the year = 39\,000 + 500 - 20\,000 = \19,500$.

Markers reward net sales, the cost of sales build-up (including carriage inwards and closing inventory), gross profit, adding other income, and profit for the year of \19,500$.

Original4 marksExplain the difference between gross profit and profit for the year, and why carriage inwards is included in cost of sales but carriage outwards is not.
Show worked answer →

Gross profit is net sales less the cost of sales (the cost of the goods actually sold). Profit for the year is gross profit plus any other income, less all the other expenses of running the business (rent, wages, and so on). Gross profit measures trading success; profit for the year is the final profit after all expenses.

Carriage inwards (the cost of bringing in goods bought) is part of the cost of getting goods ready to sell, so it is added in cost of sales. Carriage outwards (delivering goods to customers) is a selling expense incurred after the goods are ready, so it is shown among the other expenses, not in cost of sales.

Markers reward the gross profit / profit for the year distinction and the correct treatment of the two carriage costs.

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