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How do we turn a trial balance into an income statement and a statement of financial position?

The preparation of the income statement and statement of financial position for a sole trader, the calculation of gross profit and profit for the year, and the classification of assets, liabilities and capital.

A focused answer to AQA A-Level Accounting 3.1, covering the preparation of the income statement and statement of financial position for a sole trader, the calculation of gross profit and profit for the year, and the classification of assets, liabilities and capital.

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  1. What this dot point is asking
  2. The income statement
  3. The statement of financial position
  4. A worked statement
  5. Why it always balances
  6. Try this

What this dot point is asking

AQA wants you to prepare an income statement and a statement of financial position for a sole trader, calculate gross profit and profit for the year, and classify items correctly as non-current or current assets, current or non-current liabilities, and capital. This is unit 3.1.4 and the most heavily weighted preparation skill on Paper 1, usually carrying the largest single tariff in a question, with adjustments for depreciation, accruals, prepayments and bad debts folded in.

The income statement

The income statement is built in two tiers. The first tier (the trading section) ends at gross profit, the profit from buying and selling before any operating overheads. The second tier adds other income (rent or commission received, discounts received) and deducts the running expenses (wages, rent, insurance, depreciation, irrecoverable debts) to reach profit for the year. The order matters because gross profit margin and profit margin are calculated from these two distinct figures, which links to ratio analysis in unit 3.1.12.

Three adjustments routinely appear and must be applied before the statement is finalised. Depreciation is charged as an expense for the year. Accruals are added to the relevant expense and prepayments deducted, so the charge matches the period (the accruals concept). Irrecoverable debts are written off as an expense and the change in the provision for doubtful debts is added or deducted. Carry-forward errors here flow straight into the wrong profit, so handle each adjustment explicitly.

The statement of financial position

A clear vertical format helps: non-current assets, plus current assets, gives total assets; deduct current liabilities to show net current assets (working capital); add to non-current assets and deduct non-current liabilities to reach net assets. Net assets must equal the closing capital figure, which is the proof the statement balances.

A worked statement

Why it always balances

Because every transaction obeys double entry, the totals of assets always equal capital plus liabilities. The profit for the year is transferred from the income statement into capital, closing the loop between the two statements. A statement that does not balance signals an error, most often a missed adjustment or a figure placed on the wrong side.

Try this

Q1. Calculate cost of sales from opening inventory 8,0008{,}000, purchases 50,00050{,}000 and closing inventory 6,0006{,}000. [2 marks] 8,000+50,000−6,000=52,0008{,}000 + 50{,}000 - 6{,}000 = 52{,}000.

Q2. State the formula for closing capital in a sole trader's accounts. [2 marks] Opening capital plus profit for the year minus drawings.

Exam-style practice questions

Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

AQA 20188 marksFrom the following balances, prepare the income statement for the year: revenue 240,000;openinginventory240,000; opening inventory 18,000; purchases 150,000;closinginventory150,000; closing inventory 22,000; rent 16,000(ofwhich16,000 (of which 2,000 is prepaid); wages 30,000(with30,000 (with 1,000 accrued); rent received $4,000. Calculate gross profit and profit for the year.
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A full worked income statement; marks are for each correctly calculated line.

Cost of sales: opening inventory plus purchases minus closing inventory, that is 18,000+18,000 + 150,000 - 22,000=22,000 = 146,000.

Gross profit: revenue minus cost of sales, 240,000−240,000 - 146,000 = $94,000.

Add other income: rent received 4,000,giving4,000, giving 98,000.

Expenses: rent 16,000−16,000 - 2,000 prepaid = 14,000;wages14,000; wages 30,000 + 1,000accrued=1,000 accrued = 31,000; total expenses $45,000.

Profit for the year: 98,000−98,000 - 45,000 = $53,000.

Markers reward the cost of sales adjustment for inventory, the accruals and prepayments adjustments, adding other income after gross profit, and the correct final profit.

AQA 20214 marksExplain why a sole trader's statement of financial position always balances.
Show worked answer →

A 4-mark "Explain" answer links double entry to the equation.

Because every transaction is recorded by an equal debit and credit (the dual aspect), total assets always equal the total of capital plus liabilities (2 marks).

The capital section is opening capital plus profit for the year minus drawings, so the profit transferred from the income statement closes the loop and the two halves of the statement equal each other (2 marks). Markers reward the link between double entry, the accounting equation, and the role of profit and drawings in capital. A statement that does not balance signals an error or an omitted adjustment.

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