How to prepare the Income Statement

Financial Statements of a Sole Proprietorship without Adjustments

What you need

• An adjusted Trial Balance or a list of revenue and expense account balances.
• The values of opening and closing inventory for the period.
• Details of sales, purchases, sales returns, purchases returns and carriage inwards.
• Adjustments such as depreciation, accrued expenses and accrued income, if any.

Step by step

1. 1

   Write the statement heading and period

   Begin with a three-line heading: the business name, the type of statement, and the period covered. For example: 'Perniagaan Setia, Income Statement for the year ended 31 December 2024'. A correct heading signals that the statement covers a whole period, not a single date, which distinguishes it from the Statement of Financial Position.

2. 2

   Calculate net sales

   Take Sales and subtract Sales returns (returns inwards) to get Net sales. For Perniagaan Setia: Sales RM120,000 less Sales returns RM2,000 gives Net sales of RM118,000. Always use net sales, not gross sales, as the starting point for the trading section.

3. 3

   Calculate cost of sales

   Cost of sales = Opening inventory + Net purchases + Carriage inwards − Closing inventory. First find Net purchases: Purchases RM70,000 − Purchases returns RM1,000 = RM69,000. Then Cost of goods available for sale = Opening inventory RM8,000 + RM69,000 + Carriage inwards RM1,000 = RM78,000. Finally subtract Closing inventory RM6,000, giving Cost of sales of RM72,000.

4. 4

   Calculate gross profit

   Gross profit = Net sales − Cost of sales = RM118,000 − RM72,000 = RM46,000. If the cost of sales were larger than net sales, the result would be a gross loss and should be clearly labelled.

5. 5

   Add other income

   Add all income other than sales, such as commission received, rent received or discount received. Perniagaan Setia earned Commission received RM2,000, so the running total becomes RM46,000 + RM2,000 = RM48,000. This step turns gross profit into total income before expenses are deducted.

6. 6

   List and total the expenses

   List every operating expense: Salaries RM18,000, Rent RM6,000, Utilities RM3,000, and Depreciation of equipment RM1,000. Total expenses = RM28,000. Make sure carriage outwards, if any, is placed here as an expense and not in cost of sales, and include adjustments such as depreciation.

7. 7

   Determine net profit or net loss

   Net profit = (Gross profit + Other income) − Total expenses = RM48,000 − RM28,000 = RM20,000. This figure is transferred to the capital account in the Statement of Financial Position. If total expenses exceeded total income, record the result as a Net loss instead.

Second example

For a service business such as Salon Anggun, there is no trading section because nothing is bought for resale, so there are no sales, purchases or cost of sales. The statement begins directly with income. Assume Service revenue RM40,000 and Commission received RM1,000, giving total income of RM41,000.

Salon Anggun's expenses are Salaries RM30,000, Rent RM9,000, Utilities RM3,000 and Depreciation of furniture RM1,000, totalling RM43,000. Because total expenses of RM43,000 exceed total income of RM41,000, the business suffers a Net loss of RM2,000. This example shows the 'revenue less expenses' formula still applies even when the result is a loss, and a net loss reduces the owner's capital.

Common mistakes

Related chapter: Financial Statements of a Sole Proprietorship without Adjustments →

All procedures →