Textbook

1. The context and purpose of financial reporting

2. Accounting principles, concepts and qualitative characteristics

3. Double-entry bookkeeping and accounting systems

4. Recording transactions and events

5. Reconciliations

6. Preparing trial balance

7. Preparing financial statements

7.1 Statements of profit or loss and financial position

7.1.1 An introduction

7.1.2 Extracting the statements from general ledgers

7.1.3 Income tax expense

7.1.4 The formats

7.1.5 Walkthrough question one

7.1.6 Walkthrough question two

7.2 Statement of cash flow

7.3 Incomplete records

7.4 Events after the reporting period

7.5 Disclosure-notes

8. Preparing basic consolidated financial statements

9. Interpretation of financial statements

Wrapping up

7.1.4 The formats

Achievable ACCA Financial Accounting

7. Preparing financial statements

7.1. Statements of profit or loss and financial position

Our ACCA course is currently in development and is a work-in-progress.

The formats

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This chapter explains the prescribed formats for presenting the statement of profit or loss and the statement of financial position for both sole proprietorships and limited liability companies under IFRS 18.

Learning objective

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

Explain the format for the statement of financial position and the statement of profit or loss as required by the IFRS standard

Sole proprietorships and limited liability companies often prepare financial statements differently, even though the final results reported (profit and net assets/equity) are usually similar.

Sole proprietorship

Sole proprietors typically present more detail directly on the face of the financial statements rather than in separate disclosure notes. Their presentation format is also not usually bound by strict regulatory frameworks like IFRS, which allows more flexibility and simplicity.

These financial statements are prepared mainly for:

the owner (to support management decision-making)
tax authorities (for compliance)

Limited liability companies

Limited liability companies are guided by IFRS 18 Presentation and Disclosure in Financial Statements. IFRS 18 requires summarised information to be presented on the face of the financial statements, with detailed breakdowns and supporting computations provided in the Notes to the Accounts.

The presentation must comply with regulatory requirements so that financial statements are consistent and comparable across entities. Limited liability companies are also often subject to statutory audit and regulatory filing requirements, which makes adherence to prescribed accounting standards and disclosure frameworks essential.

The statement of profit or loss

IFRS 18 requires that, at a minimum, the statement of profit or loss show:

Revenue - income from ordinary business activities
Operating expenses - classified by nature, by function, or both
Share of profit or loss of associates and joint ventures - accounted for using the equity method (applicable for group accounts)
Tax expense - current and deferred tax charges
Discontinued operations - a single amount for the total of discontinued operations
Profit or loss - the net result for the period

In addition, IFRS 18 requires income and expenses to be classified into specific categories, and requires specific subtotals to be presented.

Categories:

Operating - the residual category; it holds all income and expenses not classified under investing, financing, income taxes, or discontinued operations
Investing - income and expenses from investments that do not form part of the entity’s main operating business activities
Financing - income and expenses from financing activities, such as interest on borrowings
Income taxes - current and deferred tax
Discontinued operations - the results of operations that have been discontinued

Required subtotals:

Operating profit or loss
Profit before financing and income taxes
Profit for the year, with profit before income taxes presented as a further subtotal before the tax line

In the operating category, the statement must present expenses classified:

by nature (e.g., depreciation, employee costs, raw materials),
by function (e.g., cost of sales, distribution costs, administrative expenses), or
by a mix of the two

The entity uses the classification that provides the most useful structured summary of its expenses.

All items of income and expense must be included in the statement of profit or loss unless an IFRS specifically requires or permits otherwise. The presentation should help users understand the entity’s financial performance for the reporting period.

Statement of profit or loss: sole proprietorship

Name of business

Statement of profit or loss for the year ended …(date)

	$	$
Revenue
Sales revenue	xxx
Less: Sales returns	(xxx)
Net sales revenue		xxx
Cost of sales
Opening inventory	xxx
Add: Purchases	xxx
Less: Purchases returns	(xxx)
Add: Carriage inwards	xxx
Goods available for sale	xxx
Less: Closing inventory	(xxx)
Cost of sales		(xxx)
Gross profit		xxx
Expenses
Salaries and wages	xxx
Rent and rates	xxx
Depreciation	xxx
Irrecoverable debts	xxx
Total expenses		(xxx)
Net profit		xxx

Statement of profit or loss: limited liability company

The expenses have been classified by function.

Name of company

Statement of profit or loss and other comprehensive income for the year ended…(date)

	$	$
Revenue		xxx
Cost of sales		(xxx)
Gross profit		xxx
Operating expenses:
Administrative expenses	(xxx)
Selling expenses	(xxx)
Other expenses	(xxx)
		(xxx)
Operating profit		xxx
Investing category:
Investment income		xxx
Profit before financing and income taxes		xxx
Financing category:
Finance cost		(xxx)
Profit before income taxes		xxx
Income tax		(xxx)
Profit for the year		xxx
Other comprehensive income:
Revaluation gain on PPE		xxx
Total comprehensive income for the year		xxx

Exam tip: The exam expects the IFRS 18 subtotals shown above - operating profit, profit before financing and income taxes, and profit before income taxes - not the older IAS 1 labels like PBIT or profit before tax. Also remember that a revaluation gain on property, plant and equipment is recognised in other comprehensive income, not in profit or loss for the year.

Income tax expense shown in the statement of profit or loss is the current year’s estimated tax charge, adjusted for any under- or over-provision carried over from the prior year. If last year’s estimate turned out too low, the shortfall (an under-provision) is added to this year’s charge; if it was too high, the excess (an over-provision) is deducted. Only the current year’s estimate is carried forward as income tax payable on the statement of financial position.

Example: Income tax expense with an under-provision

A company estimates its income tax charge for the current year at $18,000. Last year’s tax charge was under-provided by $1,200.

Income tax expense = $18,000 + $1,200 = $19,200

Income tax payable (statement of financial position) = $18,000

Answer: Income tax expense of $19,200; income tax payable of $18,000

The statement of financial position

The statement of financial position rests on the accounting equation: assets = liabilities + equity. It also reflects the business entity concept, which treats the business as separate from its owner - this is why an owner’s drawings reduce capital rather than being treated as an expense. Profit for the year increases capital (for a sole proprietorship) or retained earnings (for a limited company), while a revaluation gain recognised in other comprehensive income increases the revaluation surplus.

IFRS 18 requires that, at a minimum, the statement of financial position show the following line items.

Assets:

Property, plant and equipment
Intangible assets
Financial assets (excluding amounts shown under other headings)
Investments accounted for using the equity method
Inventories
Trade and other receivables
Current tax assets
Cash and cash equivalents

Liabilities:

Trade and other payables
Provisions
Financial liabilities (excluding amounts shown under other headings)
Current tax liabilities

Equity:

Issued capital and reserves attributable to owners of the parent
Non-controlling interests (for consolidated statements)

The statement of financial position must classify assets and liabilities as either current or non-current, unless a liquidity-based presentation provides a more useful structured summary. The presentation should provide information that is useful in assessing the entity’s financial position, liquidity, and solvency at the reporting date.

Statement of financial position: sole proprietorship

Name of business

Statement of financial position as at (date)

	Cost	Accumulated depreciation	Carrying amount
Non-current asset	$	$	$
Land	xxx	-	xxx
Plant and machinery	xxx	xxx	xxx
Current asset:
Inventory			xxx
Trade receivables			xxx
Cash and bank			xxx
Total assets			xxx

Financed by:
Capital			xxx
Net profit			xxx
Drawings			(xxx)
Total equity			xxx
Non-current liabilities:
Loan			xxx
Current liabilities:
Trade payables			xxx
Total equity and liabilities			xxx

Statement of financial position: limited liability company

Name of company

Statement of financial position as at (date)

	Note	$
Non-current asset
Property, plant and equipment	1	xxx
Intangible asset	2	xxx
Current asset:
Inventory		xxx
Trade receivables	3	xxx
Cash and bank		xxx
Total assets		xxx
Equity:
Share capital		xxx
Retained earnings	4	xxx
Revaluation reserve (surplus)		xxx
Share premium		xxx
Total equity		xxx
Non-current liabilities:
Debenture		xxx
Redeemable preference shares		xxx
Current liabilities:
Trade payables		xxx
Income tax payable		xxx
Total current liabilities		xxx
Total equity and liabilities		xxx

Sole proprietorships vs limited liability companies

Sole proprietors: more detail on face, little regulation, prepared for owner and tax authorities
Companies: IFRS 18 requires summarised figures on face, detail in Notes; subject to audit/regulatory filing for consistency and comparability

IFRS 18 statement of profit or loss requirements

Minimum items: revenue, operating expenses, share of profit/loss of associates/joint ventures (equity method), tax expense, discontinued operations (single amount), profit or loss
Five categories: operating (residual), investing, financing, income taxes, discontinued operations
Required subtotals: operating profit or loss, profit before financing and income taxes, profit before income taxes, profit for the year
Operating expenses classified by nature, function, or mix — whichever is most useful
All income/expenses included unless another IFRS says otherwise

Income tax expense vs payable

Tax expense = current year estimate adjusted for prior year under/over-provision (under-provision added; over-provision deducted)
Only current year’s estimate appears as income tax payable on statement of financial position

Statement of profit or loss formats

Sole proprietorship: sales revenue − returns = net sales; less cost of sales (opening inventory + purchases − returns + carriage inwards − closing inventory) = gross profit; less expenses = net profit
Company: revenue − cost of sales = gross profit; less operating expenses (by function) = operating profit; + investing income = profit before financing and income taxes; − finance cost = profit before income taxes; − tax = profit for year; + other comprehensive income (e.g., revaluation gain) = total comprehensive income
Exam tip: use IFRS 18 subtotal labels, not older IAS 1 terms (e.g. PBIT); revaluation gains sit in other comprehensive income, not profit or loss

Statement of financial position fundamentals

Based on assets = liabilities + equity
Business entity concept: drawings reduce capital, not treated as expense
Profit increases capital/retained earnings; revaluation gain increases revaluation surplus via other comprehensive income
Classify items as current or non-current unless liquidity-based presentation is more useful

IFRS 18 statement of financial position minimum items

Assets: property, plant and equipment; intangible assets; financial assets; equity-method investments; inventories; trade and other receivables; current tax assets; cash and cash equivalents
Liabilities: trade and other payables; provisions; financial liabilities; current tax liabilities
Equity: issued capital and reserves attributable to parent owners; non-controlling interests (consolidated)

Statement of financial position formats

Sole proprietorship: non-current assets shown with cost, accumulated depreciation, carrying amount; “Financed by” section = capital + net profit − drawings = total equity
Company: assets split current/non-current; equity includes share capital, retained earnings, revaluation reserve, share premium; liabilities split non-current (e.g., debenture, redeemable preference shares) and current (trade payables, income tax payable)

Next | 7.1.5 Walkthrough question one

The formats

Learning objective

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

Explain the format for the statement of financial position and the statement of profit or loss as required by the IFRS standard

Sole proprietorships and limited liability companies often prepare financial statements differently, even though the final results reported (profit and net assets/equity) are usually similar.

Sole proprietorship

These financial statements are prepared mainly for:

the owner (to support management decision-making)
tax authorities (for compliance)

Limited liability companies

The statement of profit or loss

IFRS 18 requires that, at a minimum, the statement of profit or loss show:

Revenue - income from ordinary business activities
Operating expenses - classified by nature, by function, or both
Share of profit or loss of associates and joint ventures - accounted for using the equity method (applicable for group accounts)
Tax expense - current and deferred tax charges
Discontinued operations - a single amount for the total of discontinued operations
Profit or loss - the net result for the period

In addition, IFRS 18 requires income and expenses to be classified into specific categories, and requires specific subtotals to be presented.

Categories:

Operating - the residual category; it holds all income and expenses not classified under investing, financing, income taxes, or discontinued operations
Investing - income and expenses from investments that do not form part of the entity’s main operating business activities
Financing - income and expenses from financing activities, such as interest on borrowings
Income taxes - current and deferred tax
Discontinued operations - the results of operations that have been discontinued

Required subtotals:

Operating profit or loss
Profit before financing and income taxes
Profit for the year, with profit before income taxes presented as a further subtotal before the tax line

In the operating category, the statement must present expenses classified:

by nature (e.g., depreciation, employee costs, raw materials),
by function (e.g., cost of sales, distribution costs, administrative expenses), or
by a mix of the two

The entity uses the classification that provides the most useful structured summary of its expenses.

Statement of profit or loss: sole proprietorship

Name of business

Statement of profit or loss for the year ended …(date)

	$	$
Revenue
Sales revenue	xxx
Less: Sales returns	(xxx)
Net sales revenue		xxx
Cost of sales
Opening inventory	xxx
Add: Purchases	xxx
Less: Purchases returns	(xxx)
Add: Carriage inwards	xxx
Goods available for sale	xxx
Less: Closing inventory	(xxx)
Cost of sales		(xxx)
Gross profit		xxx
Expenses
Salaries and wages	xxx
Rent and rates	xxx
Depreciation	xxx
Irrecoverable debts	xxx
Total expenses		(xxx)
Net profit		xxx

Statement of profit or loss: limited liability company

The expenses have been classified by function.

Name of company

Statement of profit or loss and other comprehensive income for the year ended…(date)

	$	$
Revenue		xxx
Cost of sales		(xxx)
Gross profit		xxx
Operating expenses:
Administrative expenses	(xxx)
Selling expenses	(xxx)
Other expenses	(xxx)
		(xxx)
Operating profit		xxx
Investing category:
Investment income		xxx
Profit before financing and income taxes		xxx
Financing category:
Finance cost		(xxx)
Profit before income taxes		xxx
Income tax		(xxx)
Profit for the year		xxx
Other comprehensive income:
Revaluation gain on PPE		xxx
Total comprehensive income for the year		xxx

Example: Income tax expense with an under-provision

A company estimates its income tax charge for the current year at $18,000. Last year’s tax charge was under-provided by $1,200.

Income tax expense = $18,000 + $1,200 = $19,200

Income tax payable (statement of financial position) = $18,000

Answer: Income tax expense of $19,200; income tax payable of $18,000

The statement of financial position

IFRS 18 requires that, at a minimum, the statement of financial position show the following line items.

Assets:

Property, plant and equipment
Intangible assets
Financial assets (excluding amounts shown under other headings)
Investments accounted for using the equity method
Inventories
Trade and other receivables
Current tax assets
Cash and cash equivalents

Liabilities:

Trade and other payables
Provisions
Financial liabilities (excluding amounts shown under other headings)
Current tax liabilities

Equity:

Issued capital and reserves attributable to owners of the parent
Non-controlling interests (for consolidated statements)

Statement of financial position: sole proprietorship

Name of business

Statement of financial position as at (date)

	Cost	Accumulated depreciation	Carrying amount
Non-current asset	$	$	$
Land	xxx	-	xxx
Plant and machinery	xxx	xxx	xxx
Current asset:
Inventory			xxx
Trade receivables			xxx
Cash and bank			xxx
Total assets			xxx

Financed by:
Capital			xxx
Net profit			xxx
Drawings			(xxx)
Total equity			xxx
Non-current liabilities:
Loan			xxx
Current liabilities:
Trade payables			xxx
Total equity and liabilities			xxx

Statement of financial position: limited liability company

Name of company

Statement of financial position as at (date)

	Note	$
Non-current asset
Property, plant and equipment	1	xxx
Intangible asset	2	xxx
Current asset:
Inventory		xxx
Trade receivables	3	xxx
Cash and bank		xxx
Total assets		xxx
Equity:
Share capital		xxx
Retained earnings	4	xxx
Revaluation reserve (surplus)		xxx
Share premium		xxx
Total equity		xxx
Non-current liabilities:
Debenture		xxx
Redeemable preference shares		xxx
Current liabilities:
Trade payables		xxx
Income tax payable		xxx
Total current liabilities		xxx
Total equity and liabilities		xxx

Achievable ACCA Financial Accounting

7. Preparing financial statements

7.1. Statements of profit or loss and financial position

Our ACCA course is currently in development and is a work-in-progress.

The formats

7 min read

Font

Discuss

Feedback

Learning objective

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

Explain the format for the statement of financial position and the statement of profit or loss as required by the IFRS standard

Sole proprietorships and limited liability companies often prepare financial statements differently, even though the final results reported (profit and net assets/equity) are usually similar.

Sole proprietorship

These financial statements are prepared mainly for:

the owner (to support management decision-making)
tax authorities (for compliance)

Limited liability companies

The statement of profit or loss

IFRS 18 requires that, at a minimum, the statement of profit or loss show:

Revenue - income from ordinary business activities
Operating expenses - classified by nature, by function, or both
Share of profit or loss of associates and joint ventures - accounted for using the equity method (applicable for group accounts)
Tax expense - current and deferred tax charges
Discontinued operations - a single amount for the total of discontinued operations
Profit or loss - the net result for the period

In addition, IFRS 18 requires income and expenses to be classified into specific categories, and requires specific subtotals to be presented.

Categories:

Operating - the residual category; it holds all income and expenses not classified under investing, financing, income taxes, or discontinued operations
Investing - income and expenses from investments that do not form part of the entity’s main operating business activities
Financing - income and expenses from financing activities, such as interest on borrowings
Income taxes - current and deferred tax
Discontinued operations - the results of operations that have been discontinued

Required subtotals:

Operating profit or loss
Profit before financing and income taxes
Profit for the year, with profit before income taxes presented as a further subtotal before the tax line

In the operating category, the statement must present expenses classified:

by nature (e.g., depreciation, employee costs, raw materials),
by function (e.g., cost of sales, distribution costs, administrative expenses), or
by a mix of the two

The entity uses the classification that provides the most useful structured summary of its expenses.

Statement of profit or loss: sole proprietorship

Name of business

Statement of profit or loss for the year ended …(date)

	$	$
Revenue
Sales revenue	xxx
Less: Sales returns	(xxx)
Net sales revenue		xxx
Cost of sales
Opening inventory	xxx
Add: Purchases	xxx
Less: Purchases returns	(xxx)
Add: Carriage inwards	xxx
Goods available for sale	xxx
Less: Closing inventory	(xxx)
Cost of sales		(xxx)
Gross profit		xxx
Expenses
Salaries and wages	xxx
Rent and rates	xxx
Depreciation	xxx
Irrecoverable debts	xxx
Total expenses		(xxx)
Net profit		xxx

Statement of profit or loss: limited liability company

The expenses have been classified by function.

Name of company

Statement of profit or loss and other comprehensive income for the year ended…(date)

	$	$
Revenue		xxx
Cost of sales		(xxx)
Gross profit		xxx
Operating expenses:
Administrative expenses	(xxx)
Selling expenses	(xxx)
Other expenses	(xxx)
		(xxx)
Operating profit		xxx
Investing category:
Investment income		xxx
Profit before financing and income taxes		xxx
Financing category:
Finance cost		(xxx)
Profit before income taxes		xxx
Income tax		(xxx)
Profit for the year		xxx
Other comprehensive income:
Revaluation gain on PPE		xxx
Total comprehensive income for the year		xxx

Example: Income tax expense with an under-provision

A company estimates its income tax charge for the current year at $18,000. Last year’s tax charge was under-provided by $1,200.

Income tax expense = $18,000 + $1,200 = $19,200

Income tax payable (statement of financial position) = $18,000

Answer: Income tax expense of $19,200; income tax payable of $18,000

The statement of financial position

IFRS 18 requires that, at a minimum, the statement of financial position show the following line items.

Assets:

Property, plant and equipment
Intangible assets
Financial assets (excluding amounts shown under other headings)
Investments accounted for using the equity method
Inventories
Trade and other receivables
Current tax assets
Cash and cash equivalents

Liabilities:

Trade and other payables
Provisions
Financial liabilities (excluding amounts shown under other headings)
Current tax liabilities

Equity:

Issued capital and reserves attributable to owners of the parent
Non-controlling interests (for consolidated statements)

Statement of financial position: sole proprietorship

Name of business

Statement of financial position as at (date)

	Cost	Accumulated depreciation	Carrying amount
Non-current asset	$	$	$
Land	xxx	-	xxx
Plant and machinery	xxx	xxx	xxx
Current asset:
Inventory			xxx
Trade receivables			xxx
Cash and bank			xxx
Total assets			xxx

Financed by:
Capital			xxx
Net profit			xxx
Drawings			(xxx)
Total equity			xxx
Non-current liabilities:
Loan			xxx
Current liabilities:
Trade payables			xxx
Total equity and liabilities			xxx

Statement of financial position: limited liability company

Name of company

Statement of financial position as at (date)

	Note	$
Non-current asset
Property, plant and equipment	1	xxx
Intangible asset	2	xxx
Current asset:
Inventory		xxx
Trade receivables	3	xxx
Cash and bank		xxx
Total assets		xxx
Equity:
Share capital		xxx
Retained earnings	4	xxx
Revaluation reserve (surplus)		xxx
Share premium		xxx
Total equity		xxx
Non-current liabilities:
Debenture		xxx
Redeemable preference shares		xxx
Current liabilities:
Trade payables		xxx
Income tax payable		xxx
Total current liabilities		xxx
Total equity and liabilities		xxx

Sole proprietorships vs limited liability companies

Sole proprietors: more detail on face, little regulation, prepared for owner and tax authorities
Companies: IFRS 18 requires summarised figures on face, detail in Notes; subject to audit/regulatory filing for consistency and comparability

IFRS 18 statement of profit or loss requirements

Minimum items: revenue, operating expenses, share of profit/loss of associates/joint ventures (equity method), tax expense, discontinued operations (single amount), profit or loss
Five categories: operating (residual), investing, financing, income taxes, discontinued operations
Required subtotals: operating profit or loss, profit before financing and income taxes, profit before income taxes, profit for the year
Operating expenses classified by nature, function, or mix — whichever is most useful
All income/expenses included unless another IFRS says otherwise

Income tax expense vs payable

Tax expense = current year estimate adjusted for prior year under/over-provision (under-provision added; over-provision deducted)
Only current year’s estimate appears as income tax payable on statement of financial position

Statement of profit or loss formats

Sole proprietorship: sales revenue − returns = net sales; less cost of sales (opening inventory + purchases − returns + carriage inwards − closing inventory) = gross profit; less expenses = net profit
Company: revenue − cost of sales = gross profit; less operating expenses (by function) = operating profit; + investing income = profit before financing and income taxes; − finance cost = profit before income taxes; − tax = profit for year; + other comprehensive income (e.g., revaluation gain) = total comprehensive income
Exam tip: use IFRS 18 subtotal labels, not older IAS 1 terms (e.g. PBIT); revaluation gains sit in other comprehensive income, not profit or loss

Statement of financial position fundamentals

Based on assets = liabilities + equity
Business entity concept: drawings reduce capital, not treated as expense
Profit increases capital/retained earnings; revaluation gain increases revaluation surplus via other comprehensive income
Classify items as current or non-current unless liquidity-based presentation is more useful

IFRS 18 statement of financial position minimum items

Assets: property, plant and equipment; intangible assets; financial assets; equity-method investments; inventories; trade and other receivables; current tax assets; cash and cash equivalents
Liabilities: trade and other payables; provisions; financial liabilities; current tax liabilities
Equity: issued capital and reserves attributable to parent owners; non-controlling interests (consolidated)

Statement of financial position formats

Sole proprietorship: non-current assets shown with cost, accumulated depreciation, carrying amount; “Financed by” section = capital + net profit − drawings = total equity
Company: assets split current/non-current; equity includes share capital, retained earnings, revaluation reserve, share premium; liabilities split non-current (e.g., debenture, redeemable preference shares) and current (trade payables, income tax payable)

Next | 7.1.5 Walkthrough question one

The formats

Learning objective

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

Explain the format for the statement of financial position and the statement of profit or loss as required by the IFRS standard

Sole proprietorships and limited liability companies often prepare financial statements differently, even though the final results reported (profit and net assets/equity) are usually similar.

Sole proprietorship

These financial statements are prepared mainly for:

the owner (to support management decision-making)
tax authorities (for compliance)

Limited liability companies

The statement of profit or loss

IFRS 18 requires that, at a minimum, the statement of profit or loss show:

Revenue - income from ordinary business activities
Operating expenses - classified by nature, by function, or both
Share of profit or loss of associates and joint ventures - accounted for using the equity method (applicable for group accounts)
Tax expense - current and deferred tax charges
Discontinued operations - a single amount for the total of discontinued operations
Profit or loss - the net result for the period

In addition, IFRS 18 requires income and expenses to be classified into specific categories, and requires specific subtotals to be presented.

Categories:

Operating - the residual category; it holds all income and expenses not classified under investing, financing, income taxes, or discontinued operations
Investing - income and expenses from investments that do not form part of the entity’s main operating business activities
Financing - income and expenses from financing activities, such as interest on borrowings
Income taxes - current and deferred tax
Discontinued operations - the results of operations that have been discontinued

Required subtotals:

Operating profit or loss
Profit before financing and income taxes
Profit for the year, with profit before income taxes presented as a further subtotal before the tax line

In the operating category, the statement must present expenses classified:

by nature (e.g., depreciation, employee costs, raw materials),
by function (e.g., cost of sales, distribution costs, administrative expenses), or
by a mix of the two

The entity uses the classification that provides the most useful structured summary of its expenses.

Statement of profit or loss: sole proprietorship

Name of business

Statement of profit or loss for the year ended …(date)

	$	$
Revenue
Sales revenue	xxx
Less: Sales returns	(xxx)
Net sales revenue		xxx
Cost of sales
Opening inventory	xxx
Add: Purchases	xxx
Less: Purchases returns	(xxx)
Add: Carriage inwards	xxx
Goods available for sale	xxx
Less: Closing inventory	(xxx)
Cost of sales		(xxx)
Gross profit		xxx
Expenses
Salaries and wages	xxx
Rent and rates	xxx
Depreciation	xxx
Irrecoverable debts	xxx
Total expenses		(xxx)
Net profit		xxx

Statement of profit or loss: limited liability company

The expenses have been classified by function.

Name of company

Statement of profit or loss and other comprehensive income for the year ended…(date)

	$	$
Revenue		xxx
Cost of sales		(xxx)
Gross profit		xxx
Operating expenses:
Administrative expenses	(xxx)
Selling expenses	(xxx)
Other expenses	(xxx)
		(xxx)
Operating profit		xxx
Investing category:
Investment income		xxx
Profit before financing and income taxes		xxx
Financing category:
Finance cost		(xxx)
Profit before income taxes		xxx
Income tax		(xxx)
Profit for the year		xxx
Other comprehensive income:
Revaluation gain on PPE		xxx
Total comprehensive income for the year		xxx

Example: Income tax expense with an under-provision

A company estimates its income tax charge for the current year at $18,000. Last year’s tax charge was under-provided by $1,200.

Income tax expense = $18,000 + $1,200 = $19,200

Income tax payable (statement of financial position) = $18,000

Answer: Income tax expense of $19,200; income tax payable of $18,000

The statement of financial position

IFRS 18 requires that, at a minimum, the statement of financial position show the following line items.

Assets:

Property, plant and equipment
Intangible assets
Financial assets (excluding amounts shown under other headings)
Investments accounted for using the equity method
Inventories
Trade and other receivables
Current tax assets
Cash and cash equivalents

Liabilities:

Trade and other payables
Provisions
Financial liabilities (excluding amounts shown under other headings)
Current tax liabilities

Equity:

Issued capital and reserves attributable to owners of the parent
Non-controlling interests (for consolidated statements)

Statement of financial position: sole proprietorship

Name of business

Statement of financial position as at (date)

	Cost	Accumulated depreciation	Carrying amount
Non-current asset	$	$	$
Land	xxx	-	xxx
Plant and machinery	xxx	xxx	xxx
Current asset:
Inventory			xxx
Trade receivables			xxx
Cash and bank			xxx
Total assets			xxx

Financed by:
Capital			xxx
Net profit			xxx
Drawings			(xxx)
Total equity			xxx
Non-current liabilities:
Loan			xxx
Current liabilities:
Trade payables			xxx
Total equity and liabilities			xxx

Statement of financial position: limited liability company

Name of company

Statement of financial position as at (date)

	Note	$
Non-current asset
Property, plant and equipment	1	xxx
Intangible asset	2	xxx
Current asset:
Inventory		xxx
Trade receivables	3	xxx
Cash and bank		xxx
Total assets		xxx
Equity:
Share capital		xxx
Retained earnings	4	xxx
Revaluation reserve (surplus)		xxx
Share premium		xxx
Total equity		xxx
Non-current liabilities:
Debenture		xxx
Redeemable preference shares		xxx
Current liabilities:
Trade payables		xxx
Income tax payable		xxx
Total current liabilities		xxx
Total equity and liabilities		xxx

Key points

Sole proprietorships vs limited liability companies

Sole proprietors: more detail on face, little regulation, prepared for owner and tax authorities
Companies: IFRS 18 requires summarised figures on face, detail in Notes; subject to audit/regulatory filing for consistency and comparability

IFRS 18 statement of profit or loss requirements

Minimum items: revenue, operating expenses, share of profit/loss of associates/joint ventures (equity method), tax expense, discontinued operations (single amount), profit or loss
Five categories: operating (residual), investing, financing, income taxes, discontinued operations
Required subtotals: operating profit or loss, profit before financing and income taxes, profit before income taxes, profit for the year
Operating expenses classified by nature, function, or mix — whichever is most useful
All income/expenses included unless another IFRS says otherwise

Income tax expense vs payable

Tax expense = current year estimate adjusted for prior year under/over-provision (under-provision added; over-provision deducted)
Only current year’s estimate appears as income tax payable on statement of financial position

Statement of profit or loss formats

Sole proprietorship: sales revenue − returns = net sales; less cost of sales (opening inventory + purchases − returns + carriage inwards − closing inventory) = gross profit; less expenses = net profit
Company: revenue − cost of sales = gross profit; less operating expenses (by function) = operating profit; + investing income = profit before financing and income taxes; − finance cost = profit before income taxes; − tax = profit for year; + other comprehensive income (e.g., revaluation gain) = total comprehensive income
Exam tip: use IFRS 18 subtotal labels, not older IAS 1 terms (e.g. PBIT); revaluation gains sit in other comprehensive income, not profit or loss

Statement of financial position fundamentals

Based on assets = liabilities + equity
Business entity concept: drawings reduce capital, not treated as expense
Profit increases capital/retained earnings; revaluation gain increases revaluation surplus via other comprehensive income
Classify items as current or non-current unless liquidity-based presentation is more useful

IFRS 18 statement of financial position minimum items

Assets: property, plant and equipment; intangible assets; financial assets; equity-method investments; inventories; trade and other receivables; current tax assets; cash and cash equivalents
Liabilities: trade and other payables; provisions; financial liabilities; current tax liabilities
Equity: issued capital and reserves attributable to parent owners; non-controlling interests (consolidated)

Statement of financial position formats

Sole proprietorship: non-current assets shown with cost, accumulated depreciation, carrying amount; “Financed by” section = capital + net profit − drawings = total equity
Company: assets split current/non-current; equity includes share capital, retained earnings, revaluation reserve, share premium; liabilities split non-current (e.g., debenture, redeemable preference shares) and current (trade payables, income tax payable)