The Income Statement of a sole trader

What the Income Statement is for

The closing transfers produced one number, net profit. The Income Statement (its full name is the Statement of Comprehensive Income) shows how the business got to that number. Someone reading it should be able to see where the money came from, what it cost to buy the goods, and what it cost to keep the doors open.

It is built in layers, and each layer answers a different question.

Interest is kept separate from operating expenses on purpose. Interest is the price of the way the business is financed, not the cost of trading. Two identical shops, one funded by a loan and one funded by the owner's own money, should show the same operating profit and different net profits.

Adjustments feed the statement

The figures in the pre-adjustment trial balance are what actually went through the bank. The Income Statement must show what the year actually used up and actually earned, which is not always the same thing.

• An expense paid for next year is taken out of this year's expense (a prepaid expense, which is an asset).
• An expense used this year but not yet paid is added in (an accrued expense, which is a liability).
• Stationery bought but not yet used is taken out of the expense (consumable stores on hand, an asset).
• Depreciation is added as an expense, because the vehicle lost value this year even though no cash moved.
• Income earned but not yet received is added in (accrued income), and income received for next year is taken out (income received in advance).

Every one of these has two effects, so every one of them also changes the Balance Sheet.

Worked example

Worked example. Khumalo Traders (owner N. Khumalo, a hardware shop in Mthatha) has a 28 February 2026 year end. After the adjustments below, the Income Statement looks like this.

Adjustments applied:

1. Insurance of R24 000 was paid, but R3 000 of it covers March to May 2026. Insurance expense drops to R21 000 and R3 000 becomes a prepaid expense.
2. The February telephone account of R1 400 has not been paid. Telephone rises from R14 600 to R16 000 and R1 400 becomes an accrued expense.
3. Stationery of R11 000 was bought; R2 000 is still unused. Stationery expense drops to R9 000 and R2 000 becomes consumable stores on hand.
4. Depreciation for the year is R34 000 (vehicles R24 000, equipment R10 000).
5. Interest of R1 000 on the fixed deposit is owed to the business but not yet received. Interest income rises to R3 000.
6. Rent of R29 000 was received, but R5 000 of it is for March 2026. Rent income drops to R24 000.

Khumalo Traders — Income Statement for the year ended 28 February 2026

Read it as a story. The shop bought goods for R750 000 and sold them for R1 250 000, so trading itself worked. Running the shop cost R356 000, which left R172 000. The loan then took R30 000 in interest, and the fixed deposit gave back R3 000. The owner is left with R145 000.

Core checkpoint: every line on the Income Statement is either income earned this year or an expense used this year. If a figure represents value the business still holds (unused stationery, insurance for next year) or still owes to someone (an unpaid telephone account), it belongs on the Balance Sheet and the Income Statement line must be adjusted to match.