Income statement of a sole proprietor
Revenue − cost of sales = gross profit. Gross profit − expenses, adjusted for accruals, prepayments, depreciation and doubtful debts = profit for the year.
Trial balance of Ruwani Fashions, Nugegoda, at 31 March 2026 (Rs.)
| Account | Debit | Credit |
|---|---|---|
| Inventory 1 April 2025 | 420,000 | |
| Purchases | 3,600,000 | |
| Sales | 6,200,000 | |
| Returns inwards | 60,000 | |
| Returns outwards | 50,000 | |
| Carriage inwards | 40,000 | |
| Salaries and wages | 720,000 | |
| Rent | 390,000 | |
| Electricity | 110,000 | |
| Advertising | 85,000 | |
| Insurance | 48,000 | |
| Bad debts | 12,000 | |
| Shop fittings at cost | 1,500,000 | |
| Accumulated depreciation: shop fittings | 300,000 | |
| Motor van at cost | 2,400,000 | |
| Accumulated depreciation: motor van | 480,000 | |
| Trade receivables | 380,000 | |
| Allowance for doubtful debts | 15,000 | |
| Cash at bank | 265,000 | |
| Cash in hand | 25,000 | |
| Trade payables | 310,000 | |
| Bank loan (repayable in 2030) | 800,000 | |
| Capital 1 April 2025 | 2,200,000 | |
| Drawings | 300,000 | |
| Totals | 10,355,000 | 10,355,000 |
Adjustments at 31 March 2026
- (1) Closing inventory: Rs. 510,000.
- (2) Rent prepaid: Rs. 30,000.
- (3) Electricity owing: Rs. 10,000.
- (4) Depreciation: shop fittings 10% on cost; motor van 20% on the reducing balance.
- (5) The allowance for doubtful debts is to be 5% of trade receivables.
- (6) Loan interest of Rs. 96,000 for the year is unpaid.
- (7) Ruwani took goods costing Rs. 25,000 for her own use; this has not been recorded.
Worked example: the workings
Work out the figures needed for the income statement of Ruwani Fashions.
- Revenue: 6,200,000 − 60,000 = 6,140,000.
- Net purchases: 3,600,000 − 50,000 (returns) − 25,000 (own use) = 3,525,000.
- Cost of sales: 420,000 + 3,525,000 + 40,000 − 510,000 = 3,475,000.
- Rent: 390,000 − 30,000 = 360,000. Electricity: 110,000 + 10,000 = 120,000.
- Depreciation: fittings 10% × 1,500,000 = 150,000; van 20% × (2,400,000 − 480,000) = 20% × 1,920,000 = 384,000.
- Allowance: 5% × 380,000 = 19,000; increase 19,000 − 15,000 = 4,000.
Revenue Rs. 6,140,000; cost of sales Rs. 3,475,000; depreciation Rs. 150,000 and Rs. 384,000; increase in allowance Rs. 4,000.
Income statement of Ruwani Fashions for the year ended 31 March 2026 (Rs.)
| Item | Rs. | Rs. |
|---|---|---|
| Sales | 6,200,000 | |
| Less: returns inwards | (60,000) | |
| Revenue | 6,140,000 | |
| Opening inventory | 420,000 | |
| Net purchases (3,600,000 − 50,000 − 25,000) | 3,525,000 | |
| Carriage inwards | 40,000 | |
| Less: closing inventory | (510,000) | |
| Cost of sales | (3,475,000) | |
| Gross profit | 2,665,000 | |
| Salaries and wages | 720,000 | |
| Rent (390,000 − 30,000) | 360,000 | |
| Electricity (110,000 + 10,000) | 120,000 | |
| Advertising | 85,000 | |
| Insurance | 48,000 | |
| Bad debts | 12,000 | |
| Increase in allowance for doubtful debts | 4,000 | |
| Depreciation: shop fittings | 150,000 | |
| Depreciation: motor van | 384,000 | |
| Loan interest | 96,000 | |
| Total expenses | (1,979,000) | |
| Profit for the year | 686,000 |
Worked example: check the totals
Verify the total expenses and the profit for the year.
- 720,000 + 360,000 + 120,000 + 85,000 + 48,000 = 1,333,000.
- 1,333,000 + 12,000 + 4,000 = 1,349,000.
- 1,349,000 + 150,000 + 384,000 + 96,000 = 1,979,000.
- Profit: 2,665,000 − 1,979,000 = 686,000.
- Second route: operating expenses 1,979,000 − 96,000 = 1,883,000; operating profit 2,665,000 − 1,883,000 = 782,000; less loan interest 96,000 = 686,000.
Total expenses Rs. 1,979,000; profit for the year Rs. 686,000.
Small retailers in Sri Lanka, from Nugegoda boutiques to village grocery shops, need an income statement to apply for a bank loan and to file income tax returns with the Inland Revenue Department.
Short answer: “Where is carriage outwards shown?” In the income statement as a selling and distribution expense, not in cost of sales.
Structured question: “Calculate cost of sales and gross profit from the given data.” Revenue = sales − returns inwards; cost of sales = opening inventory + net purchases + carriage inwards − closing inventory; gross profit = revenue − cost of sales.
Essay: “From the trial balance and adjustments, prepare the income statement of a sole proprietor for the year.” Workings first (revenue, cost of sales, each adjusted expense, depreciation, allowance), then the statement in vertical form, ending with profit for the year.
Cost of sales O + P + C − C: Opening inventory + net Purchases + Carriage inwards − Closing inventory. Carriage outwards is an expense, not cost of sales.