Why is "Treating carriage inwards or outwards incorrectly" a common mistake in Financial Statements for Sole Traders?

Why it happens: Confusing the two. How to avoid it: Carriage INWARDS is added to purchases (cost of sales); carriage OUTWARDS is a selling expense. Source: 9706 Examiner Reports

Why is "Adding closing inventory instead of deducting it" a common mistake in Financial Statements for Sole Traders?

Why it happens: Sign error in cost of sales. How to avoid it: Closing inventory is DEDUCTED in cost of sales (it has not been sold). Source: 9706 Examiner Reports

Why is "Confusing margin and mark-up" a common mistake in Financial Statements for Sole Traders?

Why it happens: Both relate gross profit to a base. How to avoid it: Margin = % of REVENUE; mark-up = % of COST. Convert: margin = mark-up ÷ (100 + mark-up). Source: 9706 Examiner Reports

Why is "Showing receivables gross of the allowance" a common mistake in Financial Statements for Sole Traders?

Why it happens: Forgetting to net off. How to avoid it: Trade receivables in the SOFP are shown NET of the allowance for irrecoverable debts. Source: 9706 Examiner Reports

Why is "Treating drawings as an expense" a common mistake in Financial Statements for Sole Traders?

Why it happens: Money left the business. How to avoid it: Drawings are deducted from CAPITAL, not charged as an expense in the statement of profit or loss. Source: 9706 Examiner Reports

Why is "Forcing the statement of financial position to balance" a common mistake in Financial Statements for Sole Traders?

Why it happens: The two halves don't agree. How to avoid it: If it does not balance, find the error (profit, drawings, an adjustment applied once) rather than inserting a plug. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Financial Statements for Sole Traders

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Detailed Study Notes

Detailed notes on Preparation of Financial Statements for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Financial Statements for Sole Traders — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

The core preparation skill. Learn the structure of a sole trader's statement of profit or loss and statement of financial position, how the year-end adjustments flow in, and how to handle incomplete records — building the figures you don't have from the ones you do.

At a glance

Statement of profit or loss: Revenue − Cost of sales = Gross profit; + other income − expenses = Profit for the year.
Cost of sales = opening inventory + purchases (+ carriage inwards − returns) − closing inventory.
Statement of financial position: Non-current + current assets − current − non-current liabilities = Net assets = Capital.
Capital section: opening capital + capital introduced + profit − drawings = closing capital.
Apply all the year-end adjustments (depreciation, accruals/prepayments, irrecoverable debts/allowance).
Incomplete records: build missing figures using control accounts, the cash/bank account, margins and the capital equation.
Present statements in good style with correct headings and International Accounting terms.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.5.2 — Prepare a statement of profit or loss and statement of financial position for a sole trader from full or incomplete accounting records (trading or service business).
Incorporate the year-end adjustments from 1.5.1.
Use control accounts, the cash book and margin/mark-up to find missing figures.

The statement of profit or loss

Revenue to gross profit to profit for the year, in the right order.

A sole trader's statement of profit or loss has a clear structure:

Statement of profit or loss	$
Revenue	X
Less Cost of sales	(X)
Gross profit	X
Add Other income (rent received, discount received, etc.)	X
Less Expenses (wages, rent, depreciation, irrecoverable debts, etc.)	(X)
Profit for the year	X

Cost of sales: $\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} + \text{Carriage inwards} - \text{Purchases returns} - \text{Closing inventory}$

A service business has no cost of sales — it goes straight from revenue (fees) to gross profit (often called just 'income'), then deducts expenses.

Apply all the adjustments (1.5.1) to the expenses and income before reaching the profit.

Revenue − cost of sales = gross profit; + other income − expenses = profit for the year.
Cost of sales = opening inventory + purchases (+ carriage inwards − returns) − closing inventory.
A service business has no cost of sales.
Apply depreciation, accruals/prepayments and irrecoverable debts adjustments.

See the full worked example for financial statements for sole traders →

The statement of financial position

Net assets equal capital; the two halves must agree.

The statement of financial position lists assets and liabilities, then the capital that financed them:

Statement of financial position	$
Non-current assets (at carrying value)	X
Current assets (inventory, receivables less allowance, prepayments, bank, cash)	X
Less Current liabilities (payables, accruals, bank overdraft)	(X)
Less Non-current liabilities (long-term loans)	(X)
Net assets	X

Capital: opening capital + capital introduced + profit − drawings	X

Net assets must equal closing capital (the accounting equation).
Non-current assets are shown at cost less accumulated depreciation; receivables net of the allowance.

Assets − liabilities = net assets = capital.
Non-current assets at carrying value; receivables net of allowance.
Capital = opening + capital introduced + profit − drawings.
The two halves must agree.

See the full worked example for financial statements for sole traders →

Incomplete records: building the missing figures

Use control accounts, the cash book, margins and the capital equation to find what's missing.

Many sole traders keep incomplete records. The exam tests building the figures you don't have from the ones you do:

Missing credit sales → reconstruct the trade receivables (control) account.
Missing credit purchases → reconstruct the trade payables (control) account.
Missing cash sales / drawings / stolen cash → reconstruct the cash account.
Missing profit (no SOPL possible) → use the capital equation: Profit = closing capital − opening capital + drawings − capital introduced.
Missing sales or purchases via margin/mark-up:
- Margin = gross profit as a % of sales;
- Mark-up = gross profit as a % of cost of sales;
- use the % to work back from one figure to another.

Example. If mark-up is 25% and cost of sales is $80,000 → gross profit = 25% × 80,000 = $20,000 → sales = $100,000.

Missing credit sales/purchases → control accounts.
Missing cash/drawings → the cash account.
Missing profit → the capital equation.
Margin (% of sales) and mark-up (% of cost) link sales, cost and gross profit.

See the full worked example for financial statements for sole traders →

Presentation and good style

Correct headings, International terms and a logical, balanced layout earn marks.

Examiners reward good style:

Three-line heading: name of the business, name of the statement, and the date (or period).
Use International Accounting terms: revenue (not sales/turnover where the format requires), trade receivables/payables, non-current assets, inventory, statement of profit or loss, statement of financial position.
Show workings clearly (e.g. cost of sales, depreciation, adjusted expenses) — marks are given for them.
Lay out figures in columns and keep the structure logical so the statement is easy to follow and balances.

A well-presented statement that applies every adjustment correctly is the most heavily-marked single task in 9706 (often worth 12-16 marks).

Three-line heading (business, statement, date/period).
Use International Accounting terms throughout.
Show workings — they earn marks.
Logical, columnar layout that balances.

Quick recap

SOPL: revenue − cost of sales = gross profit; + other income − expenses = profit for the year.
Cost of sales = opening inventory + purchases (+ carriage inwards − returns) − closing inventory.
SOFP: assets − liabilities = net assets = capital (opening + introduced + profit − drawings).
Apply all year-end adjustments (depreciation, accruals/prepayments, irrecoverable debts/allowance).
Incomplete records: control accounts, cash account, capital equation, margin/mark-up.
Mark-up % converts to margin %: margin = mark-up / (100 + mark-up).

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Cost of sales = opening inventory + purchases + carriage inwards − returns − closing inventory.
Profit for the year = gross profit + other income − expenses.
Net assets = capital = opening + capital introduced + profit − drawings.
Margin = % of sales; mark-up = % of cost; margin = mark-up ÷ (100 + mark-up).

How it’s examined

A core Paper 2 task: Prepare the statement of profit or loss and Prepare the statement of financial position for a sole trader, often from incomplete records, applying all adjustments (typically [12-16] marks). The 9706/22 (Feb-Mar 2024) Q3 was an incomplete-records sole trader. Examiner reports stress correct cost of sales, applying every adjustment, and good style.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706/22 Paper 2 question paper & mark scheme, Feb/Mar 2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Financial Statements for Sole Traders

Step-by-step solutions to past-paper-style questions on financial statements for sole traders, written exactly the way a tutor would explain them at the board.

Question type:

1Calculate cost of sales (4 marks)
Getting startedMulti-step problem• 9706 Paper 2 style• cost of sales, AO2
Question
Opening inventory $9,000; purchases$ 84,000; carriage inwards $1,200; purchases returns$ 2,000; closing inventory $11,000. Calculate the cost of sales. (4 marks)
Step-by-step solution
1. Step 1
  Net purchases = 84,000 + 1,200 (carriage inwards) − 2,000 (returns) = 83,200.
2. Step 2
  Add opening inventory 9,000 = 92,200.
3. Step 3
  Less closing inventory 11,000.
4. Step 4
  Cost of sales = $81,200.
Answer
Cost of sales = $81,200.
Examiner tip
Carriage inwards is added to purchases; closing inventory is deducted.
2Gross profit and profit for the year (5 marks)
Getting startedMulti-step problem• SOPL, AO2
Question
Revenue $150,000; cost of sales$ 90,000; rent received $3,000; expenses$ 42,000. Calculate (a) gross profit and (b) profit for the year. (5 marks)
Step-by-step solution
1. Step 1
  (a) Gross profit = 150,000 − 90,000 = $60,000.
2. Step 2
  Add other income (rent received) 3,000 = 63,000.
3. Step 3
  Less expenses 42,000.
4. Step 4
  (b) Profit for the year = $21,000.
Answer
(a) Gross profit $60,000; (b) profit for the year$ 21,000.
Examiner tip
Add other income after gross profit, then deduct expenses.
3Statement of profit or loss with adjustments (7 marks)
Building confidenceMulti-step problem• SOPL, adjustments, AO2
Question
Revenue $200,000; cost of sales$ 120,000; wages $30,000 (accrual$ 2,000 owing); rent $12,000 (prepaid$ 1,000); depreciation to charge $6,000; irrecoverable debts$ 1,500. Prepare the statement of profit or loss down to profit for the year. (7 marks)
Step-by-step solution
1. Step 1
  Gross profit = 200,000 − 120,000 = 80,000.
2. Step 2
  Wages = 30,000 + 2,000 = 32,000.
3. Step 3
  Rent = 12,000 − 1,000 = 11,000.
4. Step 4
  Add depreciation 6,000 and irrecoverable debts 1,500.
5. Step 5
  Total expenses = 32,000 + 11,000 + 6,000 + 1,500 = 50,500.
6. Step 6
  Profit for the year = 80,000 − 50,500 = $29,500.
Answer
Profit for the year = $29,500.
Examiner tip
Adjust each expense before totalling: add the wages accrual, deduct the rent prepayment.
4Statement of financial position (7 marks)
Building confidenceMulti-step problem• SOFP, AO2
Question
Non-current assets (carrying value) $90,000; inventory$ 11,000; trade receivables $14,000 (allowance$ 700); bank $5,000; trade payables$ 9,000; accruals $2,000; loan (long-term)$ 20,000; opening capital $70,000; profit$ 29,500; drawings $11,200. Prepare the statement of financial position. (7 marks)
Step-by-step solution
1. Step 1
  Current assets = inventory 11,000 + receivables (14,000 − 700) 13,300 + bank 5,000 = 29,300.
2. Step 2
  Current liabilities = payables 9,000 + accruals 2,000 = 11,000.
3. Step 3
  Net current assets = 29,300 − 11,000 = 18,300.
4. Step 4
  Net assets = NCA 90,000 + 18,300 − loan 20,000 = $88,300.
5. Step 5
  Capital = 70,000 + 29,500 − 11,200 = $88,300 — it balances.
Answer
Net assets = capital = $88,300.
Examiner tip
Receivables net of allowance; net assets must equal closing capital.
5Find sales from mark-up (5 marks)
Building confidenceMulti-step problem• mark-up, incomplete records, AO2
Question
A business marks up cost by 25%. Cost of sales for the year was $96,000. Calculate (a) the gross profit and (b) the revenue. (5 marks)
Step-by-step solution
1. Step 1
  (a) Mark-up = 25% of cost = 25% × 96,000 = $24,000 gross profit.
2. Step 2
  (b) Revenue = cost of sales + gross profit = 96,000 + 24,000 = $120,000.
Answer
(a) Gross profit $24,000; (b) revenue$ 120,000.
Examiner tip
Mark-up is a % of cost; gross profit = mark-up × cost; revenue = cost + gross profit.
6Convert margin and find cost of sales (5 marks)
StretchMulti-step problem• margin, AO2
Question
A business achieves a gross margin of 40%. Revenue was $200,000. Calculate (a) the gross profit and (b) the cost of sales. (5 marks)
Step-by-step solution
1. Step 1
  (a) Margin = 40% of revenue = 40% × 200,000 = $80,000 gross profit.
2. Step 2
  (b) Cost of sales = revenue − gross profit = 200,000 − 80,000 = $120,000.
Answer
(a) Gross profit $80,000; (b) cost of sales$ 120,000.
Examiner tip
Margin is a % of revenue; cost of sales = revenue − gross profit.
7Find credit purchases (incomplete records) (5 marks)
StretchMulti-step problem• incomplete records, AO2
Question
Opening payables $8,000; closing payables$ 9,500; payments to suppliers $72,000; discount received$ 1,400. Calculate the credit purchases for the year. (5 marks)
Step-by-step solution
1. Step 1
  Reconstruct the trade payables account; credit purchases is the balancing figure.
2. Step 2
  Debit side = payments 72,000 + discount received 1,400 + closing 9,500 = 82,900.
3. Step 3
  Credit purchases = 82,900 − opening 8,000 = $74,900.
Answer
Credit purchases = $74,900.
Examiner tip
Use the payables account to find the missing credit purchases.
8Profit from the capital equation (5 marks)
StretchMulti-step problem• incomplete records, AO2
Question
A trader keeps no full records. Opening capital $54,000; closing capital$ 63,000; drawings $14,000; capital introduced$ 3,000. Calculate the profit for the year. (5 marks)
Step-by-step solution
1. Step 1
  Profit = closing capital − opening capital + drawings − capital introduced.
2. Step 2
  = 63,000 − 54,000 + 14,000 − 3,000.
3. Step 3
  = $20,000.
Answer
Profit for the year = $20,000.
Examiner tip
When no SOPL is possible, use the movement in capital.
9Service business profit (4 marks)
Building confidenceMulti-step problem• service business, AO2
Question
A consultancy (a service business) earned fees of $90,000. Expenses were: salaries$ 48,000, rent $9,000, depreciation$ 4,000. Calculate the profit for the year. (4 marks)
Step-by-step solution
1. Step 1
  A service business has no cost of sales.
2. Step 2
  Profit = fees − expenses = 90,000 − (48,000 + 9,000 + 4,000).
3. Step 3
  = 90,000 − 61,000 = $29,000.
Answer
Profit for the year = $29,000.
Examiner tip
No cost of sales — go from fees straight to deducting expenses.
10Full profit with adjustments (8 marks)
StretchMulti-step problem• SOPL, adjustments, AO2
Question
Revenue $260,000; opening inventory$ 12,000; purchases $160,000; closing inventory$ 14,000. Expenses: wages $40,000 (accrual$ 3,000); insurance $6,000 (prepaid$ 500); depreciation $9,000; increase in allowance for irrecoverable debts$ 400; irrecoverable debts written off $1,100. Calculate the profit for the year. (8 marks)
Step-by-step solution
1. Step 1
  Cost of sales = 12,000 + 160,000 − 14,000 = 158,000.
2. Step 2
  Gross profit = 260,000 − 158,000 = 102,000.
3. Step 3
  Wages = 40,000 + 3,000 = 43,000; insurance = 6,000 − 500 = 5,500.
4. Step 4
  Expenses = 43,000 + 5,500 + 9,000 + 400 + 1,100 = 59,000.
5. Step 5
  Profit for the year = 102,000 − 59,000 = $43,000.
Answer
Profit for the year = $43,000.
Examiner tip
Adjust each expense; include both the write-off and the increase in the allowance.

Model Answers — Financial Statements for Sole Traders

High-scoring sample answers for financial statements for sole traders on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style4 marks
Q (4 marks). Calculate the cost of sales: opening inventory $13,000; purchases$ 96,000; carriage inwards $1,500; purchases returns$ 2,500; closing inventory $15,000.
Model answer
Net purchases = 96,000 + 1,500 − 2,500 = 95,000. Cost of sales = opening 13,000 + 95,000 − closing 15,000 = $93,000.
Why this scores
Marking (point-based, 4). Carriage inwards added (1); returns deducted (1); opening + closing applied (1); $93,000 (1).
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Revenue $180,000; cost of sales$ 108,000; commission received $4,000; expenses$ 50,000. Calculate the gross profit and the profit for the year.
Model answer
Gross profit = 180,000 − 108,000 = $72,000. Profit for the year = 72,000 + 4,000 (commission received) − 50,000 = $26,000.
Why this scores
Marking (point-based, 4). Gross profit $72,000 (2); add other income, deduct expenses →$ 26,000 (2).
Question 3
9706 Paper 2 style7 marks
Q (7 marks). Prepare the statement of profit or loss (to profit for the year): revenue $240,000; opening inventory$ 10,000; purchases $150,000; closing inventory$ 12,000; wages $34,000 (accrual$ 2,500); rent $14,000 (prepaid$ 1,500); depreciation $7,000; irrecoverable debts$ 1,800.
Model answer
Cost of sales = 10,000 + 150,000 − 12,000 = 148,000. Gross profit = 240,000 − 148,000 = $92,000.

Expenses:

Wages = 34,000 + 2,500 = 36,500

Rent = 14,000 − 1,500 = 12,500

Depreciation = 7,000

Irrecoverable debts = 1,800

Total = 57,800

Profit for the year = 92,000 − 57,800 = $34,200.
Why this scores
Marking (point-based, 7). Cost of sales $148,000 (2); gross profit$ 92,000 (1); adjusted wages/rent (2); expenses total (1); profit $34,200 (1).
Question 4
9706 Paper 2 style7 marks
Q (7 marks). Prepare the statement of financial position: non-current assets (carrying value) $120,000; inventory$ 12,000; trade receivables $18,000 (allowance$ 900); bank $4,000; trade payables$ 11,000; accruals $2,500; long-term loan$ 30,000; opening capital $95,000; profit$ 34,200; drawings $19,600.
Model answer
Current assets: inventory 12,000 + receivables (18,000 − 900) 17,100 + bank 4,000 = 33,100. Current liabilities: payables 11,000 + accruals 2,500 = 13,500. Net current assets = 33,100 − 13,500 = 19,600.

Net assets = 120,000 + 19,600 − 30,000 (loan) = $109,600.

Capital = 95,000 + 34,200 − 19,600 = $109,600 — it balances.
Why this scores
Marking (point-based, 7). Receivables net of allowance (1); current assets/liabilities (2); net assets $109,600 (2); capital section$ 109,600 (2).
Question 5
9706 Paper 2/3 style6 marks
Q (6 marks). A business marks up cost by 30%. Opening inventory was $14,000, purchases$ 120,000 and closing inventory $16,000. Calculate (a) the cost of sales, (b) the gross profit and (c) the revenue.
Model answer
(a) Cost of sales = 14,000 + 120,000 − 16,000 = $118,000.

(b) Mark-up = 30% of cost = 30% × 118,000 = $35,400 gross profit.

(c) Revenue = cost of sales + gross profit = 118,000 + 35,400 = $153,400.
Why this scores
Marking (point-based, 6). Cost of sales $118,000 (2); gross profit$ 35,400 (2); revenue $153,400 (2).
Question 6
9706 Paper 2/3 style6 marks
Q (6 marks). A trader does not keep full records. Opening trade receivables $16,000; closing trade receivables$ 19,000; receipts from customers $140,000; discount allowed$ 2,000; irrecoverable debts $800. All sales are on credit. Calculate the revenue for the year.
Model answer
Reconstruct the trade receivables account; credit sales (= revenue) is the balancing figure.

Credit side = receipts 140,000 + discount allowed 2,000 + irrecoverable debts 800 + closing 19,000 = 161,800. Revenue = 161,800 − opening 16,000 = $145,800.
Why this scores
Marking (point-based, 6). All credit items incl. closing balance (3); opening balance (1); arithmetic (1); revenue $145,800 (1).
Question 7
9706 Paper 2/3 style6 marks
Q (6 marks). A trader's records are incomplete. At 1 January: assets $130,000, liabilities$ 42,000. At 31 December: assets $158,000, liabilities$ 38,000. Drawings $22,000; capital introduced$ 5,000. (a) Calculate the profit for the year. (b) State one disadvantage of calculating profit this way.
Model answer
(a)

Opening capital = 130,000 − 42,000 = 88,000.

Closing capital = 158,000 − 38,000 = 120,000.

Profit = 120,000 − 88,000 + 22,000 − 5,000 = $49,000.

(b) It gives only a single total profit — it does not show revenue, cost of sales, gross profit or individual expenses, so the business cannot analyse how the profit arose or control specific costs.
Why this scores
Marking (point-based, 6). Opening/closing capital (2); profit $49,000 (2); valid disadvantage (2).
Question 8
9706 Paper 3 style8 marks
Q (8 marks). Prepare the statement of profit or loss (to profit for the year): revenue $300,000; opening inventory$ 18,000; purchases $185,000; carriage inwards$ 2,000; closing inventory $20,000; wages$ 46,000 (accrual $4,000); insurance$ 7,000 (prepaid $1,000); depreciation$ 11,000; increase in allowance for irrecoverable debts $600; irrecoverable debts written off$ 1,400.
Model answer
Cost of sales = 18,000 + 185,000 + 2,000 (carriage inwards) − 20,000 = 185,000. Gross profit = 300,000 − 185,000 = $115,000.

Expenses:

Wages = 46,000 + 4,000 = 50,000

Insurance = 7,000 − 1,000 = 6,000

Depreciation = 11,000

Allowance increase = 600

Irrecoverable debts = 1,400

Total = 69,000

Profit for the year = 115,000 − 69,000 = $46,000.
Why this scores
Marking (point-based, 8). Cost of sales incl. carriage inwards $185,000 (2); gross profit$ 115,000 (1); adjusted wages/insurance (2); all expenses incl. allowance + write-off (2); profit $46,000 (1).
Question 9
9706 Paper 2/3 style4 marks
Q (4 marks). Explain how the statement of profit or loss of a service business differs from that of a trading business.
Model answer
A trading business buys and sells goods, so its statement of profit or loss shows revenue less cost of sales = gross profit, then deducts expenses to reach the profit for the year.

A service business provides services rather than goods, so it has no cost of sales (and no inventory of goods for resale). Its income (fees) goes straight to the equivalent of gross profit, from which expenses are deducted to reach the profit for the year. So the key difference is the absence of a cost of sales / gross profit calculation for a service business.
Why this scores
Marking (point-based, 4). Trading business has cost of sales/gross profit (~2); service business has no cost of sales, fees less expenses (~2).
Question 10
9706 Paper 2/3 style4 marks
Q (4 marks). Explain why a correctly prepared statement of financial position for a sole trader must balance.
Model answer
The statement of financial position presents the accounting equation: Assets = Capital + Liabilities, i.e. net assets (assets − liabilities) = capital.

By duality, every transaction is recorded with equal debit and credit effects, so the total of the assets always equals the total of the capital plus liabilities. Therefore the net assets (top half) must equal the closing capital (bottom half). If a sole trader's statement does not balance, an entry has unequal effects, an item is missing, or the profit or drawings figure is wrong — not that the statement is allowed to differ.
Why this scores
Marking (point-based, 4). Presents the accounting equation / net assets = capital (~2); duality keeps it balanced (~2).

Key Formulae — Financial Statements for Sole Traders

The formulae you need to memorise for financial statements for sole traders on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Cost of sales
$Cost\ of\ sales = Opening\ inventory + Purchases + Carriage\ inwards - Returns - Closing\ inventory$
$Opening/Closing inventory$
inventory at the start/end of the year
$Purchases$
goods bought for resale
$Carriage inwards$
delivery cost of goods bought (added)
When to use
To calculate cost of sales in the statement of profit or loss.
Example
9,000 + 84,000 + 1,200 − 2,000 − 11,000 = 81,200.
Mark-up and margin
$Margin = \frac{Mark\text{-}up}{100 + Mark\text{-}up} \times 100$
$Mark-up$
gross profit as a % of cost of sales
$Margin$
gross profit as a % of revenue
When to use
To convert between mark-up and margin in incomplete-records questions.
Example
25% mark-up → 25/125 × 100 = 20% margin.

Key Definitions and Keywords — Financial Statements for Sole Traders

Definitions to memorise and the exact keywords mark schemes credit for financial statements for sole traders answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Statement of profit or loss
Examiner keyword
A statement showing revenue, cost of sales, gross profit, other income, expenses and profit for the year.
Statement of financial position
Examiner keyword
A statement showing assets, liabilities and capital at a point in time; net assets equal capital.
Cost of sales
Examiner keyword
Opening inventory + purchases (+ carriage inwards − returns) − closing inventory.
Gross profit
Examiner keyword
Revenue less cost of sales.
Margin
Examiner keyword
Gross profit expressed as a percentage of revenue.
Mark-up
Examiner keyword
Gross profit expressed as a percentage of cost of sales.
Incomplete records
Examiner keyword
Accounting records that are not a full double entry system; missing figures are found using control accounts, the cash account, the capital equation and margin/mark-up.
Carriage inwards
The delivery cost of goods bought for resale; added to purchases in cost of sales.

Common Mistakes and Misconceptions — Financial Statements for Sole Traders

The traps other students keep falling into on financial statements for sole traders questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Treating carriage inwards or outwards incorrectly
9706 Examiner Reports
Why it happens
Confusing the two.
How to avoid it
Carriage INWARDS is added to purchases (cost of sales); carriage OUTWARDS is a selling expense.
✕Adding closing inventory instead of deducting it
9706 Examiner Reports
Why it happens
Sign error in cost of sales.
How to avoid it
Closing inventory is DEDUCTED in cost of sales (it has not been sold).
✕Confusing margin and mark-up
9706 Examiner Reports
Why it happens
Both relate gross profit to a base.
How to avoid it
Margin = % of REVENUE; mark-up = % of COST. Convert: margin = mark-up ÷ (100 + mark-up).
✕Showing receivables gross of the allowance
9706 Examiner Reports
Why it happens
Forgetting to net off.
How to avoid it
Trade receivables in the SOFP are shown NET of the allowance for irrecoverable debts.
✕Treating drawings as an expense
9706 Examiner Reports
Why it happens
Money left the business.
How to avoid it
Drawings are deducted from CAPITAL, not charged as an expense in the statement of profit or loss.
✕Forcing the statement of financial position to balance
9706 Examiner Reports
Why it happens
The two halves don't agree.
How to avoid it
If it does not balance, find the error (profit, drawings, an adjustment applied once) rather than inserting a plug.

Financial Statements for Sole Traders

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Calculate cost of sales (4 marks)

2Gross profit and profit for the year (5 marks)

3Statement of profit or loss with adjustments (7 marks)

4Statement of financial position (7 marks)

5Find sales from mark-up (5 marks)

6Convert margin and find cost of sales (5 marks)

7Find credit purchases (incomplete records) (5 marks)

8Profit from the capital equation (5 marks)

9Service business profit (4 marks)

10Full profit with adjustments (8 marks)

Cost of sales

Mark-up and margin

Statement of profit or loss

Statement of financial position

Cost of sales

Gross profit

Margin

Mark-up

Incomplete records

Carriage inwards

✕Treating carriage inwards or outwards incorrectly

✕Adding closing inventory instead of deducting it

✕Confusing margin and mark-up

✕Showing receivables gross of the allowance

✕Treating drawings as an expense

✕Forcing the statement of financial position to balance