5.1 Sole Traders

A sole trader is a business owned and run by one person, where the owner receives all the profits but is also personally liable for all the business debts.

Income Statement for a Trading Business

A trading business sells goods. The income statement calculates the profit or loss made from selling those goods.

The format of an income statement for a trading business is as follows:

1. Sales Revenue
2. Less: Cost of Goods Sold (COGS)
3. = Gross Profit
4. Less: Operating Expenses
5. = Net Profit

Cost of Goods Sold (COGS) includes the direct costs associated with producing or acquiring the goods sold. This typically includes the cost of materials, direct labour, and direct manufacturing overheads.

Operating Expenses are the costs incurred in running the business, other than the direct costs of goods sold. Examples include rent, salaries, utilities, and advertising.

Item	Amount (£)
Sales Revenue	$100,000
Less: Cost of Goods Sold	$40,000
= Gross Profit	$60,000
Less: Operating Expenses	$20,000
= Net Profit	$40,000

Income Statement for a Service Business

A service business provides services rather than selling goods. The income statement calculates the profit or loss made from providing those services.

The format of an income statement for a service business is simpler than for a trading business.

1. Service Revenue
2. Less: Operating Expenses
3. = Net Profit

Service Revenue is the income earned from providing services. Operating Expenses are the costs incurred in running the business, such as salaries, rent, utilities, and advertising.

Item	Amount (£)
Service Revenue	$80,000
Less: Operating Expenses	$30,000
= Net Profit	$50,000

Note: The income statement is a crucial financial document that shows the profitability of a business over a specific period. It is prepared using accrual accounting principles, meaning revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands.