Financial statements: the income statement and statement of financial position
The income statement, also called the profit and loss account, shows a business's revenue, costs and profit over a trading period, usually a year.
Before you start
Make sure you're comfortable with these topics first:
Method
- For the income statement, identify revenue (total sales income) and the cost of sales (the direct cost of the goods or services sold).
- Calculate gross profit: revenue - cost of sales.
- Identify expenses (other operating costs not included in cost of sales, e.g. rent, salaries, marketing).
- Calculate net profit: gross profit - expenses.
- For the statement of financial position, separate items into assets (what the business owns, e.g. equipment, cash, money owed by customers) and liabilities (what it owes, e.g. loans, money owed to suppliers).
- Check that total assets equal total liabilities plus owners' equity, since the statement of financial position must always balance.
- Remember that the income statement covers a period, e.g. for the year ended, while the statement of financial position is a snapshot as at one date.
Worked example
A business has revenue of 80,000 pounds for the year. Its cost of sales is 32,000 pounds and its other expenses (rent, wages and marketing) total 28,000 pounds. Calculate the business's gross profit and net profit for the year.
- Calculate gross profit: revenue - cost of sales = 80,000 - 32,000 = 48,000 pounds.
- Calculate net profit: gross profit - expenses = 48,000 - 28,000.
- Calculate: 48,000 - 28,000 = 20,000 pounds.
- State the answer: gross profit for the year is 48,000 pounds and net profit is 20,000 pounds.
Practice questions
Try each question, then tap to reveal the answer.
Q1What does the income statement show?Show answer
Answer: A business's revenue, costs and profit over a trading period, such as a year.
Q2What does the statement of financial position show?Show answer
Answer: What a business owns (assets) and owes (liabilities), plus owners' equity, at a single point in time.
Q3State the formula for gross profit.Show answer
Answer: Gross profit = revenue - cost of sales.
Q4State the formula for net profit.Show answer
Answer: Net profit = gross profit - expenses.
Q5A business has revenue of 50,000 pounds and cost of sales of 21,000 pounds. Calculate its gross profit.Show answer
Answer: 50,000 - 21,000 = 29,000 pounds.
Q6Give one example of an asset and one example of a liability on a statement of financial position.Show answer
Answer: Asset: equipment or cash. Liability: a bank loan or money owed to suppliers.
Q7What equation must always balance on a statement of financial position?Show answer
Answer: Total assets = total liabilities + owners' equity (capital).
Q8A business has gross profit of 35,000 pounds and expenses of 22,000 pounds. Calculate its net profit.Show answer
Answer: 35,000 - 22,000 = 13,000 pounds.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
A retail business reports the following figures for the year: revenue 120,000 pounds; cost of sales 68,000 pounds; rent 14,000 pounds; wages 22,000 pounds; other expenses 6,000 pounds. (a) Calculate the business's gross profit. (2 marks) (b) Calculate the business's total expenses. (2 marks) (c) Calculate the business's net profit. (2 marks)
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 6 available
Explain why a business owner might want to look at both the income statement and the statement of financial position, rather than just one of them, when judging how well the business is performing.
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 6 available
See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
Want more practice on paper? Download the financial statements: the income statement and statement of financial position worksheet pack - 7 pages of exam-style questions with a full mark scheme. One email opens every download in this browser for 14 days - no account, no card. Print it for personal and classroom use.
Next topics
Not quite what you needed?
Tell us what is missing on financial statements: the income statement and statement of financial position, or which topic to write up next. Every request is read, and we reply to every one.
Build a full practice pack.
This topic is one of hundreds in the library - pick the ones a student needs and generate a printable PDF in minutes.