5.3 Income Statements

Cambridge IGCSE Business Studies (0450)

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2026 📋 Syllabus Objectives — What You Need to Know

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

5.3.1 — What Profit Is and Why It Is Important

  1. Explain how a profit is made
  2. Describe the importance of profit to private sector businesses (e.g. reward for risk, source of finance)
  3. Explain the difference between profit and cash

5.3.2 — Income Statements

  1. Identify and explain the main features of an income statement (revenue, cost of sales, gross profit, profit, and retained profit)
  2. Use simple income statements to make business decisions based on profit calculations

PART 1 — What Is Profit and Why Does It Matter?

1.1 What Are Final Accounts?

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At the end of every financial year (usually a 12-month period), businesses produce documents called final accounts. These are official financial records that show:

  • How much money the business made or lost over the year
  • How much the business is worth overall

One of the most important final accounts is the income statement — which is the main focus of this topic.

1.2 How Is a Profit Made?

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Almost every private sector business (businesses owned by individuals, not the government) has one major goal: to make a profit.

What Is Profit?

Profit is the money left over after a business has paid all of its costs. Think of it like this:

You bake and sell cakes. You earn $100 from selling them. But the ingredients, packaging, and electricity cost you $60. Your profit is $40 — the amount you keep after covering your costs.

The Basic Profit Formula

Profit=Revenue−Total Costs\text{Profit} = \text{Revenue} - \text{Total Costs}
  • Revenue = all the money coming in from selling goods or services
  • Total Costs = all the money going out to run the business

Profit vs. Loss

SituationMeaning
Revenue > Total CostsThe business makes a profit ✅
Total Costs > RevenueThe business makes a loss ❌

Example: A bakery earns $5,000 in revenue this month. Its total costs are $3,500. Profit = $5,000 − $3,500 = $1,500 profit ✅

Another month, the bakery earns only $2,000 but costs are $2,800. $2,000 − $2,800 = −$800 loss ❌

How Can a Business Increase Its Profit?

There are three main ways:

  1. Increase revenue without increasing costs — e.g. sell more products or raise prices
  2. Reduce costs without reducing revenue — e.g. find a cheaper supplier
  3. A combination of both — increase revenue and reduce costs at the same time

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