What is an income statement for a sole trader?
5 Comparing sole trader and company financial statement formatsThe balance sheet is the fundamental financial statement because it expresses the balance sheet equation (Assets = Capital + Liabilities or Assets – Liabilities = Capital) which underlies double-entry bookkeeping and financial accounting. The balance sheet summarises the balances in the general ledger accounts related to assets (the resources of the business), liabilities (the debts and other obligations of the business) and capital (the owners’ equity) at a date. The balance sheet shows the financial position of the business at a point in time. Show
The income statement summarises the changes in assets and liabilities (recorded as the flow of income and expenses during a period of time) that generated the profit or loss for the period. The income statement shows the financial performance of the business over a period of time. Flow statements for a period link the balance sheet at the start of the period to the balance sheet at the end of the period. The income statement is a flow statement because it shows how income and expenses caused the increase or decrease in capital from one period to the next. The cash flow statement is a flow statement because it shows the increase or decrease in cash from one period to the next. The statement of changes in equity is also a flow statement. Figure 6 below shows an example of how the flow statements link the opening and closing balance sheets.  Figure 6 An example showing the relationship between stocks and flows of William’s business Show description|Hide description Figure 6 shows William’s balance sheet as at 2 January on the left hand side (the stock statement at the start of the period) and William’s balance sheet as at 6 January on the right hand side (the stock statement at the end of the period). The stock statement at the start of the period shows Bank £10,000 in blue and Owner’s capital £10,000 in purple. Debit side: Total assets £10,000 = Credit side: Total capital £10,000. The stock statement at the end of the period shows Bank £7,400 in blue and owner’s capital £11,400 in purple. In black it shows also on the debit side the assets of van £4,000 and computer £2,000. In black it shows on the credit side a loan of £2,000. Hence total assets (Bank + Van + Computer) £13,400 = total capital and liabilities £13,400. The flow statements link these two balance sheets at two points in time by showing what happened during that period. The first flow statement is the income statement for the period ended 6 January. It shows in black £1,500 sales less £1,000 cost of sales = £500 profit, whereby the profit number is shown in orange. The second flow statement is William’s cash flow statement which reconciles the opening bank balance of £10,000 at 2 January with the closing bank balance of £7,400 at 6 January (both in blue). Opening cash £10,000 plus £3,500 cash inflow less £6,100 cash outflow leads to a net cash outflow of £2,600 during the period. The third flow statement is William’s statement of changes in capital for the period ended 6 January which reconciles opening capital £10,000 (purple) to closing capital £11,400 (purple) by adding £1,000 of capital introduced during the period and the profit for the period of £500 (orange), and then deducting drawings of £100. Figure 6 An example showing the relationship between stocks and flows of William’s business In Section 5.1 you will look at the balance sheet and income statement for a sole trader. In Section 5.2 you will look at the same financial statements for a company. Section 5.3 discusses the statement of changes in equity for a company and Section 5.4 looks at cashflow statement for a company. Take your learning further Take your learning furtherMaking the decision to study can be a big step, which is why you’ll want a trusted University. We’ve pioneered distance learning for over 50 years, bringing university to you wherever you are so you can fit study around your life. Take a look at all Open University courses. If you’re new to university-level study, read our guide on Where to take your learning next, or find out more about the types of qualifications we offer including entry level Access modules, Certificates, and Short Courses. Want to achieve your ambition? Study with us and you’ll be joining over 2 million students who’ve achieved their career and personal goals with The Open University. Browse all Open University courses All self-employed persons must calculate and report their business income as part of their total personal income in Form B/B1. Freelancers, commission agents, hawkers, taxi drivers, sole-proprietors and partners in a partnership are self-employed persons. Sole-Proprietors and PartnersGenerally, sole-proprietors and partners registered with the Accounting and Corporate Regulatory Authority (ACRA) are self-employed. You are also considered a self-employed person if you earn a living by carrying on a trade, business, profession or vocation.
Examples of Self-Employed Persons
Summary of Filing Obligations for Sole-Proprietors, Precedent Partners and Individual Partners
Calculating the Adjusted Profit/LossUse this formula to arrive at the adjusted profit/loss for reporting to IRAS:
Revenue
ExampleThis is the total receipts of your business which may be:
Revenue is the total gross income received from your business. Gross Profit/Loss
ExampleAllowable Business Expenses
ExampleAdjusted Profit/Loss
ExamplePreparing the Statement for Reporting Adjusted Profit/Loss for Sole-ProprietorshipIncrease in Revenue threshold of 2-line statement to $200,000 for sole-proprietorship from Year of Assessment (YA) 2021 onwards IRAS requires business income to be reported using a 2-line or 4-line statement. You should use the 4-line statement when your revenue is more than $200,000. 2-Line StatementYou should report your business income using the 2-line statement when your revenue is $200,000 or less ($100,000 or less for YA 2020 and before).
Example 1: 2-Line Statement of a Tuition Teacher
ExampleTina, a tuition teacher, earns $40,000 a year giving tuition. She earns ≤ $200,000 and, therefore, may report her income using the 2-line statement. In this case, her net earnings as a tuition teacher will be $30,000 (assuming her expenses is $10,000)
4-Line StatementYou should report your business income using the 4-line statement when your revenue is more than $200,000 (more than $100,000 for YA 2020 and before).
Example 2: 4-Line Statement of Seller of Mobile Phones
ExampleGerald buys and sells mobile phones. He sold $300,000 of mobile phone last year. The cost of goods sold was $120,000 and his allowable business expense is $20,000. Gerald should use the 4-line statement to report his business income.
Summary Table
Preparing the Statement for Reporting Adjusted Profit/Loss for Partnership2-Line Statement (New)With effect from YA 2022, the 2-line statement is extended to partnerships with revenue of $200,000 or less as part of IRAS’ continuous efforts to simplify tax filing for small businesses. You have to report the partnership income in the Form P using the 2-line statement when your revenue is $200,000 or less from YA 2022.
4-Line StatementYou have to report the partnership income in the Form P using the 4-line statement when your revenue is more than $200,000 from YA 2022. For YA 2021 and before, the partnership income is to be reported in the Form P using the 4-line statement regardless of the amount of revenue earned.
Calculating and Reporting the Divisible Profit/Loss for PartnershipCalculating Divisible Profit/LossDivisible profit/loss is the adjusted profit/loss minus partners' salaries, allowances, bonuses, CPF contributions, interest on capital and any other expenses paid on behalf of all the partners. Use this formula to arrive at divisible profit for reporting to IRAS.
Please note that if the total taxable revenue of all your sole-proprietorship businesses exceeded $1 million in the last 12 months, or is expected to exceed $1 million in the next 12 months, you should register yourself for GST.
Example: Distribution of Divisible Profit/Loss Between Two PartnersAB Partnership is made up of Partner A and Partner B. It was agreed between Partner A and Partner B that a yearly salary of $26,000 and $24,800 will be paid to them respectively and the basis of sharing of divisible profit is 60:40. For the year ended 31 Dec 2020, the partnership made a profit of $34,000 (after deducting partners' salaries). Partner A and Partner B have decided to retain the profit in the partnership for business use. The income for A and B will be as follows:
Partner A and Partner B's share of partnership income is $46,400 and $38,400 respectively. The income will be taxed under each individual partner's names even though the divisible profit of $34,000 was retained in the partnership account. Reporting Divisible Profit/LossThe precedent partner reports the income earned and business expenses annually to IRAS using Form P. You can use this sample working sheet (XLS, 35KB) as a guide. For details, refer to Filing for Precedent Partners. After the precedent partner file the Form P, the precedent partner must inform the other self-employed partner of their share of profit or loss which they will declare as their business income in Form B/B1. The precedent partner can refer to the responsibilities of precedent partners for more details. What 3 things are on an income statement?Revenues, Expenses, and Profit
Each of the three main elements of the income statement is described below.
Does a sole proprietor need an income statement?As a self-employed individual, you may not have considered the need to prepare financial statements for your small business. However, there is one financial statement you may be required to prepare for tax purposes, and that is the profit and loss statement the IRS requires from sole proprietors.
What is in the income statement?An income statement shows a company's revenues, expenses and profitability over a period of time. It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement. It shows your: revenue from selling products or services. expenses to generate the revenue and manage your business.
What should be recorded on an income statement?The income statement shows a company's expense, income, gains, and losses, which can be put into a mathematical equation to arrive at the net profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.
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