prepare income statements for trading businesses and for service businesses

5.1 Sole Traders

A sole trader is a business owned and run by one person. Think of it like a lemonade stand you set up on a sunny day. You decide what to sell, how much to charge, and you keep all the profits (minus costs). 📋

Objective

Prepare income statements for:

1. Trading businesses (selling goods)
2. Service businesses (providing services)

Trading Businesses

A trading business buys goods and sells them. The key figures are:

• Revenue – money from sales
• Cost of Goods Sold (COGS) – cost of items sold
• Gross Profit – $Revenue - COGS$
• Operating Expenses – rent, wages, utilities, etc.
• Net Profit – $Gross Profit - Operating Expenses$

Example: Lemonade Stand

Service Businesses

A service business sells intangible services. The main figures are:

• Revenue – money from services rendered
• Operating Expenses – wages, marketing, equipment, etc.
• Net Profit – $Revenue - Operating Expenses$

Example: Tutoring Service

Step‑by‑Step: Creating an Income Statement

1. Gather all sales receipts and expense vouchers.
2. Calculate Revenue by adding up all sales.
3. For trading businesses, add up COGS to find Gross Profit:
   • $Gross Profit = Revenue - COGS$
4. List all Operating Expenses (rent, wages, utilities).
5. Subtract operating expenses from gross profit (or revenue for services) to get Net Profit:
   • $Net Profit = Gross Profit - Operating Expenses$
   • or $Net Profit = Revenue - Operating Expenses$ for services.
6. Arrange the figures in a table format as shown above.
7. Check that all numbers add up correctly – a good practice is to double‑check the math with a calculator or spreadsheet.

Remember: the income statement tells you how much money the sole trader made (or lost) during a period. It’s like a report card for your business! 📈