Prepare a service sole trader's statement of profit or loss
Prepare profit for a service business using income earned and adjusted operating expenses, without inventing a trading inventory figure.
Section 1.5 · Preparation of financial statements
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover objective 1.5.2 only: sole-trader statements from full and incomplete records. Adjustments (1.5.1) have separate lessons; partnerships (1.5.3) and limited companies (1.5.4) remain to be mapped. Practice is self-checked, not an official Cambridge grade.
Before you begin
- Use the Topic 1.2 double-entry system and Topic 1.5.1 period adjustments. Distinguish business profit from owner drawings and capital introduced.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What does profit compare in a service-business statement?
What you will learn
- Calculate income earned by the reporting date
- Adjust service expenses for accruals and prepayments
- Prepare and check a service-business profit statement
Match service income and costs to work performed
A service business earns revenue by providing services. Use the amount earned in the period, adjusted for income received in advance or earned but not yet received. Cash collected is not automatically equal to income earned.
Classify costs using the records and statement format requested. Some services have direct costs, such as technician wages or materials; other costs are operating expenses. Do not insert trading inventory or cost of sales unless the business has such a trading activity and the question provides the information.
Adjust expenses before calculating profit
Add accrued expenses and deduct prepayments from the recorded expense for the period. Include current depreciation, irrecoverable-debt expense and allowance movements when relevant. Use each adjustment once and check whether it was already included in the trial-balance amount.
Profit for the year is earned income less relevant costs and expenses. The statement does not by itself show cash generated or prove that the business is profitable in cash terms.
Pause and explain
Fees earned are $32,000. Expenses are $18,000, including all adjustments. What is profit?
Worked example
A consultancy earned fees of $48,000. Wages are $26,000, rent $7,200, utilities $1,800, depreciation $2,000 and an allowance increase expense $300. Calculate profit for the year before tax.
Show the worked solution
- Total expenses = 26,000 + 7,200 + 1,800 + 2,000 + 300 = $37,300.
- Profit = service income $48,000 − expenses $37,300.
- No inventory or trading cost is stated, so do not invent a trading cost-of-sales line.
Answer Profit for the year before tax is $10,700.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A service firm earned fees of $36,000. Wages paid were $20,000, including $2,000 for next year; unpaid wages of $1,500 relate to this year. Other expenses are $4,500. Find adjusted expenses and profit.
Give me a hint
Remove the future-period wages and accrue the unpaid current-period amount.
Compare my reasoning
- Adjusted wages = 20,000 − 2,000 + 1,500 = $19,500.
- Total expenses = 19,500 + 4,500 = $24,000.
- Profit = 36,000 − 24,000 = $12,000.
Adjusted expenses are $24,000 and profit is $12,000.
Look for these in your work
- Prepayment removed
- Accrual added
- Profit correct
A design studio received $2,400 in December for a project. By year-end, it had completed three-quarters of the service. Calculate income earned and income received in advance.
Give me a hint
Apply the completed-work proportion to the contract fee.
Compare my reasoning
- Income earned = 2,400 × 3/4 = $1,800.
- Income received in advance = 2,400 − 1,800 = $600.
- Recognise earned income of $1,800 and a $600 liability for unfinished work.
Income earned is $1,800 and income received in advance is $600.
Look for these in your work
- Completion proportion applied
- Unearned amount calculated
- Liability stated
A service-business owner reports a $10,000 profit and says the business must therefore have $10,000 more cash. Give two reasons why this conclusion may be wrong.
Give me a hint
Profit and cash are measured on different bases and timings.
Compare my reasoning
- Income may have been earned on credit but not yet collected.
- Expenses such as depreciation reduce profit without a current cash payment; loan repayments or asset purchases affect cash but not all current profit.
- Review cash flow and working-capital movements before concluding how cash changed.
Profit is not the change in cash. Credit income and accruals affect timing; non-cash depreciation reduces profit, while capital purchases and loan repayments use cash outside the profit calculation.
Look for these in your work
- Credit timing identified
- Non-cash or investing item identified
- Cash evidence recommended
Common mistakes
- Treating cash receipts as income without checking when services were performed
- Adding an inventory figure when none exists
- Forgetting year-end accruals and prepayments
What can you explain now?
A service fee was received in advance for work to be done next year. What happens to current-period income?
Compare with the explanation
Reduce it by the amount not yet earned and recognise a liability
The business still owes the service at the reporting date.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State how an expense accrual and a fee received in advance affect current profit and liabilities.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.