Statement of profit or loss for a sole trader

Structure

1. Revenue less sales returns (returns inwards).

2. Cost of sales = opening inventory + purchases + carriage inwards - purchases returns - closing inventory.

3. Gross profit = net revenue - cost of sales.

4. Add other income (discount received, rent received, commission received, profit on disposal, decrease in allowance for irrecoverable debts).

5. Less expenses (wages, rent, carriage outwards, discount allowed, depreciation, irrecoverable debts, increase in allowance, loss on disposal, loan interest).

6. Profit for the year (or loss).

The heading names the business, the statement and the period: 'Statement of profit or loss for the year ended 31 March 2026'. Deductions are shown in brackets.

Worked layout

Statement of profit or loss for the year ended 31 March 2026

Common slips

• Carriage inwards is part of cost of sales; carriage outwards is an expense.
• Drawings are never an expense: they reduce capital in the statement of financial position.
• Goods taken by the owner reduce purchases.
• Discount allowed is an expense; discount received is income.
• The June 2024 examiners' report noted candidates wrongly included items such as a profit on disposal in the wrong place, or interest only partly paid: always charge the full interest for the period, accruing any unpaid part.

Worked example

Using the figures above, show how cost of sales and gross profit are found.

1. Net revenue = 186,000 - 2,400 = 183,600.
2. Cost of sales = 14,200 + 98,500 + 1,600 - 1,900 - 16,800 = 95,600.
3. Gross profit = 183,600 - 95,600 = 88,000.
4. Profit for the year = 88,000 + 4,450 - 54,650 = 37,800.

Answer: Gross profit £88,000; profit for the year £37,800.

Check yourself

1. Opening inventory £9,400; purchases £62,000; carriage inwards £800; purchases returns £1,300; closing inventory £11,200. Calculate cost of sales.
   Show answer

   £59700. 9,400 + 62,000 + 800 - 1,300 - 11,200 = 59,700.

2. Revenue £120,000; sales returns £3,000; cost of sales £71,500. Calculate gross profit.
   Show answer

   £45500. (120,000 - 3,000) - 71,500 = 45,500.

3. Gross profit £48,200; discount received £600; expenses £31,900 (excluding drawings of £15,000). Calculate profit for the year.
   Show answer

   £16900. 48,200 + 600 - 31,900 = 16,900. Drawings are not an expense.

4. Where does carriage outwards appear?
   • In cost of sales
   • As an expense after gross profit
   • As a deduction from revenue
   • In the statement of financial position
   Show answer

   As an expense after gross profit. Delivering goods to customers is a selling expense.

5. The owner withdraws £12,000 cash for personal use. How is this shown in the financial statements?
   • As an expense in the statement of profit or loss
   • As a reduction in revenue
   • As a current liability
   • Deducted from capital in the statement of financial position
   Show answer

   Deducted from capital in the statement of financial position. Drawings reduce the owner's capital; they are not a cost of running the business.

6. Purchases were £54,000 before the owner took goods costing £700 for personal use. Opening inventory £6,000; closing inventory £7,500. Calculate cost of sales.
   Show answer

   £51800. Purchases are reduced by 700: 6,000 + 53,300 - 7,500 = 51,800.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.