5.1. Sole trader Income statement is drafted as per accounting period

Sole Trader Income Statement

The Income Statement (also called Profit and Loss Account) shows the financial performance of a sole trader over a specific accounting period. It calculates profit or loss by comparing revenues earned and expenses incurred.

1. Purpose of the Income Statement

• Determine profit or loss for the period

• Help the owner make business decisions

• Provide information to banks or investors

• Comply with accounting principles (accrual principle, matching principle)

2. Accounting Period

• The income statement is prepared for a specific period, usually:

  • Monthly

  • Quarterly

  • Annually

• Only revenue earned and expenses incurred during the period are included.

3. Structure of a Sole Trader Income Statement

4. Key Points in Drafting

1. Revenue Recognition: Only revenue earned during the period is included.

2. Expense Matching: Expenses are matched to the period in which revenue was earned (matching principle).

3. Accrual Adjustments: Include:

   • Prepaid expenses (asset)

   • Accrued expenses (liability)

4. Cost of Goods Sold (COGS):

   $\text{COGS} = \text{Opening Inventory + Purchases – Closing Inventory}$COGS=Opening Inventory + Purchases – Closing Inventory

5. Example

Given:

• Sales: Ksh 150,000

• Opening Inventory: Ksh 20,000

• Purchases: Ksh 80,000

• Closing Inventory: Ksh 15,000

• Expenses: Rent Ksh 10,000; Salaries Ksh 25,000

Income Statement:

6. Short Exam-Ready Summary

• The Income Statement shows profit or loss for a specific accounting period.

• Structure: Revenue – COGS = Gross Profit – Expenses = Net Profit/Loss

• Include adjustments for prepaid and accrued expenses.

• Helps evaluate business performance and make decisions.