Edexcel IGCSE Accounting: Financial statements of a sole trader (4AC1) – Revision Notes

These notes condense section 4.1, Financial statements of a sole trader, from Topic 4 of the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. The two points are 4.1a (income statements showing gross profit and profit for the year) and 4.1b (statements of financial position showing assets, liabilities and equity). No tier labels are given. For full explanations and two complete worked examples, use the study guide.

Links: Edexcel IGCSE Accounting course hub, printable checklist, free diagnostics and the practice questions. All businesses and figures are invented and in dollars.

4.1a Income statement: layout to learn

Name of business
Income statement for the year ended (date)

Revenue
Less sales returns
Net revenue
Cost of sales:
  Opening inventories
  Add purchases
  Add carriage inwards
  Less purchases returns
  Less closing inventories
Gross profit
Add other income (for example discount received)
Less expenses (each listed)
Profit for the year  (or loss for the year)

Formulae

Item	How to find it
Net revenue	Revenue - sales returns
Cost of sales	Opening inventories + purchases + carriage inwards - purchases returns - closing inventories
Gross profit	Net revenue - cost of sales
Profit for the year	Gross profit + other income - expenses

Where each trial balance item goes

Item	Placed in	Why
Sales	Top of income statement	Revenue
Sales returns	Deducted from revenue	Reduces net revenue
Purchases	Cost of sales	Goods bought for resale
Purchases returns	Deducted in cost of sales	Goods sent back
Carriage inwards	Cost of sales	Cost of getting goods to the business
Carriage outwards	Expenses	Cost of delivering to customers
Discount received	Added to gross profit	Other income
Discount allowed	Expenses	Cost of encouraging early payment
Wages, rent, insurance, general expenses	Expenses	Running costs
Depreciation charge for the year	Expenses	Using up of non-current assets
Loan interest	Expenses	Cost of borrowing
Drawings	Not in the income statement	Owner’s withdrawals reduce equity
Purchase of non-current assets	Not in the income statement	Capital expenditure

4.1b Statement of financial position: layout to learn

Name of business
Statement of financial position at (date)

Non-current assets      Cost   Accumulated depreciation   Carrying amount
Current assets
  Inventories
  Trade receivables
  Other receivables
  Bank
  Cash
Current liabilities
  Trade payables
  Other payables
  Bank overdraft
Working capital (current assets - current liabilities)
Non-current liabilities
  Loan
Net assets
Equity
  Capital at start
  Add profit (or less loss)
  Less drawings
  Capital at end

Definitions

Term	Meaning
Asset	Something the business owns or is owed that will give future benefit
Liability	Something the business owes
Non-current asset	Kept for use over more than a year
Current asset	Expected to become cash within a year
Current liability	Due within a year
Non-current liability	Due after more than a year
Equity	Owner’s stake in the business: assets less liabilities
Carrying amount	Cost less accumulated depreciation
Working capital	Current assets less current liabilities
Net assets	Non-current assets + working capital - non-current liabilities

Order of current assets

Inventories, trade receivables, other receivables, bank, cash. The idea is least liquid first, most liquid last.

Method in steps

1. Read the heading: is the statement for a period or at a date?
2. Underline closing inventories, depreciation charge and any other adjustments given in the question.
3. Income statement: net revenue, cost of sales, gross profit.
4. Add other income and list every expense. Total them. Profit or loss for the year.
5. Statement of financial position: carrying amounts of non-current assets, then current assets and current liabilities, working capital, non-current liabilities, net assets.
6. Equity: capital at start, plus profit (or minus loss), minus drawings.
7. Check that net assets equal equity. If not, find the error before moving on.

Must-know distinctions

• Revenue versus profit. Revenue is the sales figure at the top. Profit for the year is what is left after cost of sales and all expenses.
• Gross profit versus profit for the year. Gross profit stops before running expenses. Profit for the year is after them.
• Carriage inwards versus carriage outwards. Inwards is cost of sales; outwards is an expense.
• Drawings versus expenses. Drawings are the owner’s personal take; expenses are business costs.
• Capital versus equity. Capital is the owner’s investment at the start; equity at the end includes profit, loss and drawings.
• Current versus non-current. The dividing line is one year.
• Income statement versus statement of financial position. One is a period; the other is a moment.

Presentation checklist

• Headings: business name, name of statement and the date wording (“for the year ended” or “at”).
• Show every subtotal: net revenue, cost of sales, gross profit, total expenses, profit for the year.
• In the statement of financial position, show cost, accumulated depreciation and carrying amount in separate columns.
• Label the sections: non-current assets, current assets, current liabilities, non-current liabilities, equity.
• Put brackets round a negative figure such as a loss or negative working capital.
• Finish with the check: net assets equal closing capital.

Worked reminder

Rubina Chaudhry runs Tern Street Stationery. For the year ended 31 July 2026 her records show: sales 52,000; sales returns 1,200; opening inventories 3,000; purchases 31,000; carriage inwards 700; purchases returns 900; closing inventories 3,400; discount received 260. Expenses are wages 8,200, rent 3,600, insurance 640, carriage outwards 520, general expenses 1,340, depreciation 1,100 and discount allowed 180. Her capital at 1 August 2025 was 18,000 and her drawings were 8,500.

Net revenue      52,000 - 1,200 = 50,800
Cost of sales    3,000 + 31,000 + 700 - 900 - 3,400 = 30,400
Gross profit     50,800 - 30,400 = 20,400
Add discount received 260                = 20,660
Expenses         8,200 + 3,600 + 640 + 520 + 1,340 + 1,100 + 180 = 15,580
Profit for the year   20,660 - 15,580 = 5,080
Closing capital  18,000 + 5,080 - 8,500 = 14,580

The closing capital of 14,580 is the figure that the net assets in her statement of financial position must equal.

A loss, an overdraft and the accounting equation

When expenses exceed gross profit plus other income, the result is a loss for the year and it is deducted from capital. A bank overdraft goes under current liabilities. If current liabilities exceed current assets, working capital is negative and is shown in brackets. The accounting equation is assets = liabilities + equity, or in the vertical layout, net assets = equity.

Quick self-test

1. Opening inventories are 5,200, purchases 27,800 and closing inventories 4,900. Find cost of sales (no other items).
2. Revenue is 41,500, sales returns 1,500 and cost of sales 28,100. Find gross profit.
3. In which part of the income statement does carriage outwards go?
4. Gross profit is 11,900, discount received 250 and expenses 8,430. Find profit for the year.
5. Opening capital is 22,000, profit 3,720 and drawings 5,000. Find closing capital.
6. State where drawings are shown.
7. Equipment cost 12,000 and accumulated depreciation is 7,500. Find the carrying amount.
8. Current assets are 9,300 and current liabilities 6,150. Find working capital.
9. A loan repayable in five years is which type of liability?
10. Total assets are 56,000 and total liabilities 21,800. Find equity.
11. Is the purchase of a new delivery van an expense of the year? Give a reason.
12. Which statement is prepared for a period of time?

Answers

1. 5,200 + 27,800 - 4,900 = 28,100.
2. 41,500 - 1,500 = 40,000 net revenue; 40,000 - 28,100 = 11,900.
3. Expenses (after gross profit).
4. 11,900 + 250 - 8,430 = 3,720.
5. 22,000 + 3,720 - 5,000 = 20,720.
6. In the equity section of the statement of financial position, deducted from capital plus profit. Not in the income statement.
7. 12,000 - 7,500 = 4,500.
8. 9,300 - 6,150 = 3,150.
9. A non-current liability.
10. 56,000 - 21,800 = 34,200.
11. No. It is capital expenditure, so it is a non-current asset in the statement of financial position. Only its depreciation is an expense.
12. The income statement.

Where marks are usually lost

• Using closing inventories at the start of cost of sales, or forgetting to deduct them.
• Leaving carriage inwards out of cost of sales, or putting it in expenses.
• Deducting drawings in the income statement.
• Adding a loss to capital instead of deducting it.
• Not showing accumulated depreciation, so the carrying amount is missing.
• Putting current assets in the wrong order or mixing current and non-current items.
• Forgetting the dates and the name of the business in the headings.
• Giving gross profit but not carrying on to profit for the year.
• Showing a bank overdraft as an asset.
• Not checking that net assets equal equity.

Frequently asked questions

What is working capital? Working capital is current assets less current liabilities. Adding it to non-current assets and deducting non-current liabilities gives net assets, which must equal equity.

How is a non-current asset shown in the statement of financial position? Show the asset at cost, less accumulated depreciation, to give the carrying amount. Accumulated depreciation includes previous years’ depreciation as well as this year’s charge.

What happens to equity when a sole trader makes a loss? A loss for the year is deducted from opening capital, along with drawings, so equity falls. Adding a loss to capital is a common error.

Why do closing inventories appear in both financial statements? Closing inventories are deducted in cost of sales in the income statement and listed as a current asset in the statement of financial position. They should not be used at the start of cost of sales, which begins with opening inventories.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 4 The preparation of financial statements, section 4.1 Financial statements of a sole trader, points (a) and (b).