The Structure of the Income Statement (SQA National 5 Business Management): Revision Note
Exam code: X810 75
Elements of an income statement
An income statement records the income and costs of a business incurred over a period of time (usually one year)
The statement is also known as a profit-and-loss account
Four types of profit are calculated in the income statement
Gross profit
Net profit
Profit after tax
Retained profit
The extract from the income statement for Toys and Trikes PLC shows figures for both 2022 and 2023, which enables year-on-year comparisons to be made
Income statement for Toys and Trikes Ltd
2024 (£000) | 2023 (£000) | |
|---|---|---|
Revenue | 274 | 262 |
Cost of sales | 169 | 154 |
Gross profit | 105 | 108 |
Expenses | 48 | 44 |
Profit for the year | 57 | 64 |
The main elements of the income statement
1. Sales revenue
Money generated through selling goods and services
Calculated by Price x Quantity
In 2024, Toys and Trikes Ltd earned sales revenue of £274,000
2. Cost of sales
The cost of producing or buying in the goods actually sold by the business during a time period
They may also be referred to as the cost of goods sold
Includes the costs of raw materials, packaging and labour used to produce the goods
In 2024, Toys and Trikes Ltd had cost of sales of £169,000, which included materials and labour
3. Gross profit
Gross profit is made when revenue is greater than the cost of sales
Calculated by Sales Revenue - Cost of sales
The gross profit for Toys and Trikes Ltd was therefore £274,000 - £169,000 = £105,000
4. Profit for the year
Profit made by a business after all costs have been deducted from revenue
Costs are sometimes called expenses or overheads
Calculated by Gross profit - Expenses
In 2024, Toys and Trikes Ltd made a gross profit of £105,000
It had expenses of £48,000, which included advertising and equipment
Profit for the year was therefore £105,000 - £48,000 = £57,000
Examiner Tips and Tricks
Profit calculations are commonly tested in the exam.
Make sure that you can distinguish between the different types of profit, state the formulas, and apply the calculations correctly.
Interpreting an income statement
Income statements inform managers whether the business is making a profit or loss
They allow the comparison of performance to previous years, aid with future forecasts and can be used to make comparisons with competitors
Finance managers are able to interrogate the data in order to make beneficial changes or set new strategic objectives
Case Study
Harbour Café is a small, family-run business located on the seafront in Oban. It serves breakfast, lunch, and home baking to both locals and tourists.
The café’s owner wants to understand how well the business performed over the past year, so she prepares an income statement for the year ending 31 March 2025.
Income statement for The Harbour Café - year ending 31 March 2025
Item | £ |
|---|---|
Sales revenue | 180,000 |
Less cost of sales | 72,000 |
Gross profit | 108,000 |
Less expenses: | |
Wages | 55,000 |
Rent | 18,000 |
Utilities | 7,000 |
Advertising | 2,000 |
Insurance | 1,000 |
Miscellaneous costs | 2,000 |
Total expenses | 85,000 |
Profit for the year | £23,000 |
The income statement shows
The café made a gross profit of £108,000
The café is selling its food and drinks at a healthy margin compared with the cost of ingredients
After deducting all expenses, the café achieved a profit for the year of £23,000
This profit can be reinvested into the business, used to pay off debt, or kept as retained profit to help cover future costs
Questions to consider when analysing the income statement
Business is making a profit | Business is making a loss |
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Examiner Tips and Tricks
Students often confuse an income statement with a cash budget. Remember, it shows profit over a period, not cash movement
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