10.1 Financial Statements

2026 Syllabus Objectives

By the end of this topic, you should be able to explain:

  1. The meaning and purpose of the statement of profit or loss
  2. The contents of a statement of profit or loss: revenue, cost of sales, gross profit, expenses, profit from operations, taxation, profit for the year, dividends, retained earnings
  3. How to amend a statement of profit or loss
  4. The impact on the statement of profit or loss of a given change
  5. The meaning and purpose of the statement of financial position
  6. The contents of a statement of financial position: non-current assets, current assets, current liabilities, net current assets, net assets, non-current liabilities, reserves and equity
  7. How to amend a statement of financial position
  8. The relationships between items in the two statements
  9. The difficulties of valuing inventory
  10. The net realisable value method
  11. The role of depreciation in the accounts
  12. The impact of straight-line depreciation on both financial statements

Section 1: The Statement of Profit or Loss

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What It Is and Why It Matters

The statement of profit or loss (sometimes called the income statement) is a financial document that shows how much money a business earned, how much it spent, and whether it made a profit or a loss over a specific period of time — usually one year.

Think of it like a scorecard for the year. It answers the question: "Did the business make money this year?"

Who uses it and why:

  • Managers use it to check whether targets were met and to plan for the future.
  • Shareholders (people who own shares in the company) use it to see if they will receive a dividend (a share of the profits).
  • The government uses it to calculate how much tax the business must pay.
  • Employees use it to judge whether the business is doing well enough for them to ask for a pay rise.
  • Suppliers use it to check whether the business can afford to pay its bills.

The Contents of the Statement of Profit or Loss

The statement is built up step by step. Each item is calculated from the one before it. Here is every item you need to know:

1. Revenue (also called Sales Revenue or Turnover)

This is the total money a business receives from selling its goods or services. It does not yet account for any costs.

Formula: Revenue = Selling price × Number of units sold

Example: A bakery sells 1,000 loaves at £2 each → Revenue = £2,000

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