Prepare a trading sole trader's statement of profit or loss
Turn full accounting records into revenue, cost of sales, gross profit and profit for the year for a trading business.
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
How do sales returns affect net revenue?
What you will learn
- Calculate net revenue and cost of sales
- Prepare gross profit and profit for the year
- Use adjusted balances without double counting
Build the trading result in a fixed order
Start with sales revenue and deduct sales returns to find net revenue. Cost of sales is opening inventory plus net purchases plus carriage inwards, less closing inventory. Net purchases are purchases less purchase returns where the question gives them.
Gross profit is net revenue less cost of sales. Add other income if relevant, then deduct the expenses for the period to find profit for the year. Use the statement format requested and do not treat drawings or capital introduced as business expenses or income.
Use adjusted figures in the statement
Apply relevant accruals, prepayments, irrecoverable debts, allowances, depreciation and inventory adjustments before calculating final profit. Where the trial balance already includes an amount, adjust the existing balance by the required movement only.
Show workings for net revenue, net purchases and cost of sales. Recheck that each inventory figure belongs to the same reporting period and that returns are deducted from the correct total.
Pause and explain
Opening inventory is $4,000, net purchases $18,000 and closing inventory $5,000. What is cost of sales?
Worked example
A trader has sales $52,000, sales returns $2,000, opening inventory $7,000, purchases $24,000, purchase returns $1,000 and carriage inwards $1,500. Closing inventory is $6,000. Wages are $9,000, rent $3,000, depreciation $2,000 and irrecoverable debts $1,000; other income is $500. Calculate gross profit and profit for the year.
Show the worked solution
- Net revenue = 52,000 − 2,000 = $50,000.
- Net purchases = 24,000 − 1,000 = $23,000; cost of sales = 7,000 + 23,000 + 1,500 − 6,000 = $25,500.
- Gross profit = 50,000 − 25,500 = $24,500. Profit = 24,500 + 500 − 9,000 − 3,000 − 2,000 − 1,000 = $10,000.
Answer Gross profit is $24,500 and profit for the year is $10,000.
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.
Sales $40,000; sales returns $1,200; opening inventory $5,500; net purchases $18,300; carriage inwards $700; closing inventory $4,800. Find net revenue, cost of sales and gross profit.
Give me a hint
Calculate the three subtotals in order.
Compare my reasoning
- Net revenue = 40,000 − 1,200 = $38,800.
- Cost of sales = 5,500 + 18,300 + 700 − 4,800 = $19,700.
- Gross profit = 38,800 − 19,700 = $19,100.
Net revenue $38,800; cost of sales $19,700; gross profit $19,100.
Look for these in your work
- Net revenue correct
- Cost of sales correct
- Gross profit correct
Gross profit is $22,400. Other income is $600. Expenses are wages $8,200, rent $3,000, depreciation $1,500 and irrecoverable debt expense $400. Calculate profit for the year.
Give me a hint
Add other income, then deduct all period expenses.
Compare my reasoning
- Total expenses = 8,200 + 3,000 + 1,500 + 400 = $13,100.
- Profit = 22,400 + 600 − 13,100.
- Profit for the year is $9,900.
Profit for the year is $9,900.
Look for these in your work
- Expenses totalled
- Other income included once
- Profit correct
A trader has profit of $14,000 before drawings of $5,000 and capital introduced of $2,000. Explain why profit remains $14,000 and identify the effect of those two amounts on closing capital.
Give me a hint
Profit measures trading performance; drawings and owner funding change equity, not the profit calculation.
Compare my reasoning
- Do not deduct drawings in the statement of profit or loss.
- Closing capital increases by capital introduced and decreases by drawings.
- Profit plus these owner movements increases capital by 14,000 + 2,000 − 5,000 = $11,000; add opening capital to find closing capital.
Profit remains $14,000. The two owner movements increase capital by a net $2,000 − $5,000 = −$3,000; adding the $14,000 profit increases closing capital by $11,000 before opening capital.
Look for these in your work
- Profit separated from owner transactions
- Capital movements correct
- Net capital change correct
Common mistakes
- Adding closing inventory to cost of sales
- Treating purchase returns as a reduction in sales
- Deducting drawings as an expense
What can you explain now?
Which inventory figure is deducted when calculating cost of sales?
Compare with the explanation
Closing inventory
Closing inventory remains unsold at the reporting date.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the formula for cost of sales and distinguish gross profit from profit for the year.
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.