Income Statements & Balance Sheets (Years 9–11) — Business Studies

An income statement shows profit over a period; a balance sheet shows what a business owns and owes at a point in time.

Two key financial statements tell the story of a business: the income statement shows profit over a period, and the statement of financial position (balance sheet) shows its position on a single day.

Why this matters Owners, investors and lenders read these statements to judge whether a business is profitable and financially strong before trusting it with money.

The income statement

This statement shows step by step how profit is made over a period, usually one year. It starts with the money earned from sales and takes away costs in stages to reveal two levels of profit.

Revenue − cost of goods sold = gross profit.
Gross profit − other expenses (rent, wages, marketing) = net profit (profit for the year).

Income statement (£)	Year
Revenue	50,000
Cost of goods sold	(30,000)
Gross profit	20,000
Other expenses	(12,000)
Net profit	8,000

The statement of financial position (balance sheet)

This lists what the business owns (assets) and owes (liabilities) on one date.

Non-current assets: long-life items such as machinery and premises.
Current assets: cash, stock and money owed by customers.
Liabilities: money the business owes, such as loans and money owed to suppliers.

The statement always balances because assets are funded by liabilities plus the owner's capital.

In the example above, the business turned £50,000 of revenue into £20,000 of gross profit, and after other expenses of £12,000 was left with £8,000 of net profit for the year. Cost of goods sold and expenses are shown in brackets because they are subtracted.

Each expense step subtracts from the running total: revenue falls to gross profit after cost of goods sold, then falls again to net profit after other expenses.

What they tell us

The income statement shows whether the business is profitable — does it earn more than it spends?
The balance sheet shows whether it is financially strong — does it own more than it owes?
Lenders often look most closely at the balance sheet, while owners watch the profit trend on the income statement.

Together they give a fuller picture than either alone: a firm can be profitable yet carry heavy debts, or debt-free yet barely profitable. Reading both prevents a misleading conclusion from a single figure.

Put these steps in order to calculate net profit on an income statement:

Start with revenue
Subtract cost of goods sold to get gross profit
List other expenses (rent, wages, marketing)
Subtract other expenses from gross profit to get net profit

Common exam mistake: subtracting other expenses straight from revenue and skipping the gross profit step entirely. Always calculate gross profit first (revenue − cost of goods sold), then subtract other expenses from that figure to reach net profit.

Exam technique: even if a question only asks for net profit, show the gross profit line as a working step — examiners mark income statement questions in stages, so skipping straight to the final figure can cost method marks.