Opening inventory 2000, purchases 15000, closing inventory 3000. Find cost of goods sold. [2 marks]

Sales 25000, cost of goods sold 14000. Find gross profit. [1 mark]

Gross profit 11000, total expenses 6000, commission received 500. Find the profit for the year. [2 marks]

ScotlandAccountingSyllabus dot point

How do you prepare an income statement (trading and profit and loss account) for a sole trader, finding cost of goods sold, gross profit and profit for the year?

Preparing an income statement (trading, profit and loss account) for a sole trader, calculating cost of goods sold, gross profit, and profit for the year.

A focused answer to the SQA National 5 Accounting content on the income statement, covering the trading section that finds cost of goods sold and gross profit, the profit and loss section that deducts expenses and adds other income, and how the profit for the year is calculated for a sole trader.

Generated by Claude Opus 4.811 min answerUpdated 2026-06-15

Reviewed by: AI editorial process; not yet individually human-reviewed

Have a quick question? Jump to the Q&A page

Jump to a section

What this dot point is asking
The two sections of the income statement
The trading section: cost of goods sold and gross profit
The profit and loss section: profit for the year
Examples in context
Try this

What this dot point is asking

The SQA wants you to prepare an income statement (the trading, profit and loss account) for a sole trader: the trading section that finds cost of goods sold and gross profit, and the profit and loss section that deducts expenses and adds other income to find the profit for the year.

The two sections of the income statement

The income statement is built in order. First the trading section works out how much profit the goods themselves made; then the profit and loss section deducts the running costs of the business.

The trading section: cost of goods sold and gross profit

You cannot compare sales with purchases directly, because some goods bought are still unsold at the year end. The cost of goods sold adjusts purchases for the inventory (stock) held at the start and end of the year.

Find cost of goods sold and gross profit

A sole trader has opening inventory $\pounds 3000$ , purchases $\pounds 20000$ , carriage inwards $\pounds 500$ , closing inventory $\pounds 4000$ , and sales of $\pounds 35000$ .

Step 1: Assemble the cost of goods sold

The formula adds carriage inwards (the cost of bringing goods into the business) to purchases, then adjusts for inventory. Opening inventory represents goods available at the start; closing inventory is subtracted because those goods have not yet been sold and so their cost should not reduce this period's profit:

\text{Cost of goods sold} = 3000 + 20000 + 500 - 4000 = \pounds 19500

Step 2: Deduct from sales to find gross profit

Gross profit measures the trading margin, the surplus left after the direct cost of the goods sold is taken away from revenue:

\text{Gross profit} = 35000 - 19500 = \pounds 15500

Final answer: Cost of goods sold $= \pounds 19500$ ; gross profit $= \pounds 15500$ .

The profit and loss section: profit for the year

Starting from gross profit, add any other income the business earned (for example rent received or commission received), then deduct all the running expenses such as wages, rent, insurance, advertising, electricity and carriage outwards.

Prepare a full income statement

A sole trader has: sales $\pounds 60000$ , opening inventory $\pounds 5000$ , purchases $\pounds 32000$ , carriage inwards $\pounds 1000$ , closing inventory $\pounds 6000$ , rent received $\pounds 2000$ , and expenses of wages $\pounds 11000$ , rent $\pounds 5000$ , insurance $\pounds 2000$ , advertising $\pounds 1000$ .

Step 1: Complete the trading section

Build the cost of goods sold by adding carriage inwards to purchases and adjusting for inventory held at each end of the year:

\text{Cost of goods sold} = 5000 + 32000 + 1000 - 6000 = \pounds 32000

\text{Gross profit} = 60000 - 32000 = \pounds 28000

Step 2: Add other income

Rent received is income earned by letting out business premises or property, so it is added to gross profit rather than treated as a deduction:

28000 + 2000 = \pounds 30000

Step 3: Deduct all expenses to find the profit for the year

Total the expenses first, then subtract the single total in one step to reduce the risk of arithmetic errors:

\text{Total expenses} = 11000 + 5000 + 2000 + 1000 = \pounds 19000

\text{Profit for the year} = 30000 - 19000 = \pounds 11000

Step 4: Present the statement

Income statement	£	£
Sales		60000
Less cost of goods sold		(32000)
Gross profit		28000
Add rent received		2000
		30000
Less expenses
Wages	11000
Rent	5000
Insurance	2000
Advertising	1000	(19000)
Profit for the year		11000

Examples in context

A clothing shop buys $\pounds 30000$ of stock, pays $\pounds 1000$ to have it delivered in (carriage inwards), and ends the year with $\pounds 5000$ unsold. Its cost of goods sold reflects only the stock actually sold, so the gross profit fairly measures the trading margin. After deducting wages, rent and electricity, the profit for the year shows what the owner actually earned - the figure a lender or the owner most wants to see, and the bottom line this dot point produces.

Try this

Q1. Opening inventory $\pounds 2000$ , purchases $\pounds 15000$ , closing inventory $\pounds 3000$ . Find cost of goods sold. [2 marks]

Cue. $2000 + 15000 - 3000 = \pounds 14000$ .

Q2. Sales $\pounds 25000$ , cost of goods sold $\pounds 14000$ . Find gross profit. [1 mark]

Cue. $25000 - 14000 = \pounds 11000$ .

Q3. Gross profit $\pounds 11000$ , total expenses $\pounds 6000$ , commission received $\pounds 500$ . Find the profit for the year. [2 marks]

Cue. $11000 + 500 - 6000 = \pounds 5500$ .

Exam-style practice questions

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

SQA N5 style5 marksA sole trader has opening inventory 4000 pounds, purchases 26000 pounds, carriage inwards 1000 pounds and closing inventory 5000 pounds. Sales were 50000 pounds. Calculate the cost of goods sold and the gross profit.

Show worked answer →

Cost of goods sold $=$ opening inventory $+$ purchases $+$ carriage inwards $-$ closing inventory. So $4000 + 26000 + 1000 - 5000 = \pounds 26000$ (1 mark for adding carriage inwards to purchases, 1 mark for deducting closing inventory, 1 mark for the cost of goods sold of $\pounds 26000$ ). Gross profit $=$ sales $-$ cost of goods sold $= 50000 - 26000 = \pounds 24000$ (1 mark for method, 1 mark for the answer). Markers reward including carriage inwards in the cost of buying goods and deducting closing inventory before finding gross profit.

SQA N5 style4 marksA business has gross profit of 24000 pounds, rent received of 1000 pounds, and expenses of wages 9000 pounds, rent 4000 pounds and insurance 2000 pounds. Calculate the profit for the year.

Show worked answer →

Add other income to gross profit: $24000 + 1000 = \pounds 25000$ (1 mark). Total the expenses: $9000 + 4000 + 2000 = \pounds 15000$ (1 mark). Profit for the year $=$ gross profit plus other income, less expenses $= 25000 - 15000 = \pounds 10000$ (1 mark for method, 1 mark for the answer). Markers reward adding the rent received as other income, totalling the expenses, and the correct profit for the year of $\pounds 10000$ .

Related dot points

Sources & how we know this

National 5 Accounting Course Specification — SQA (2023)
Suggested layouts for financial statements in National 5 and Higher Accounting — SQA (2018)