Key Concepts
The Statement of Financial Performance is a financial statement that shows the income earned and expenses incurred over a period of time. It tells stakeholders whether the business made a profit or a loss during that period.
Why prepare it at regular intervals?
Two accounting theories explain this:
- Going concern theory: the business is assumed to continue operating indefinitely — it is not being wound up, so it makes sense to measure performance over defined periods.
- Accounting period theory: because the business continues indefinitely, financial statements must be prepared at regular intervals (monthly, quarterly, or annually) to provide timely information for decision-making.
The format depends on business type:
Trading business (buys and sells physical goods):
[Business Name]
Statement of Financial Performance for the year ended [day month year]
$ $
Sales revenue X
Less: Sales returns (X)
Net sales revenue X
Less: Cost of sales (X)
─────
Gross profit X
Add: Other income
Commission income X
Discount received X
Rental income X X
─────
Less: Other expenses
Wages and salaries X
Rent expense X
Utilities expense X
Bank charges X (X)
─────
Profit/(Loss) for the period X
Two portions of a trading business's statement:
- Trading portion — calculates gross profit/loss. It shows three lines: net sales revenue (sales revenue − sales returns), cost of sales, and gross profit/loss.
- Profit-or-loss portion — calculates profit/loss for the period (gross profit + other income − expenses)
A service business has no trading portion — it has no goods to sell, so there is no gross profit. Its statement goes straight from service fee revenue into the profit-or-loss portion.
Service business (provides services, not goods):
[Business Name]
Statement of Financial Performance for the year ended [day month year]
$ $
Service fee revenue X
Add: Other income
Commission income X
Rental income X X
─────
Less: Other expenses
Salaries expense X
Rent expense X
Utilities expense X (X)
─────
Profit/(Loss) for the period X
Key differences — trading vs service:
| Trading | Service | |
|---|---|---|
| Revenue line | Sales revenue | Service fee revenue |
| Deduct sales returns? | Yes | No |
| Has cost of sales? | Yes | No |
| Has gross profit line? | Yes | No |
Classifying accounts for the Statement of Financial Performance:
| Category | Accounts |
|---|---|
| Revenue | Sales revenue, Service fee revenue |
| Deduction from revenue | Sales returns |
| Cost of sales | Cost of sales |
| Other income | Commission income, Discount received, Rental income, Interest income |
| Expenses | Wages and salaries, Salaries expense, Rent expense, Utilities expense, Insurance expense, Discount allowed, Transport expense, Maintenance expense, Bank charges, Advertising expense, Interest expense |
Result:
- Income > expenses → Profit for the period
- Income < expenses → Loss for the period
For a trading business, build the profit in three steps:
Step 1: Calculate Net Sales Revenue
Step 2: Calculate Gross Profit
Step 3: Calculate Profit/(Loss) for the Period
For a service business (no cost of sales, no gross profit), it simplifies to one step:
| Account | $ |
|---|---|
| Sales revenue | 85,000 |
| Sales returns | 3,200 |
| Cost of sales | 42,500 |
| Wages and salaries | 12,000 |
| Rent expense | 6,000 |
| Discount received | 800 |
| Commission income | 1,200 |
| Bank charges | 300 |
| Bank loan interest | 500 |
| Interest on bank deposit | 300 |
Required: Prepare the Statement of Financial Performance for the year ended 31 December 20X5.
- Revenue: Sales revenue $85,000
- Deduction: Sales returns $3,200
- Cost of sales: $42,500
- Other income: Discount received $800, Commission income $1,200, Interest income* $300
- Expenses: Wages and salaries $12,000, Rent expense $6,000, Bank charges $300, Interest expense* $500
Note — Interest expense and Interest income:When a business borrows money from a bank, the bank charges a fee for lending — this is the cost of using borrowed money. In the Statement of Financial Performance, this cost is recorded as "Interest expense", not "Bank loan interest" or "Bank interest charge." Conversely, when a business deposits money with a bank, the bank pays the business a fee for holding the funds — this is recorded as "Interest income", not "Interest earned" or "Bank deposit interest." Always use these exact account names in your answer.
Saffron Trading
Statement of Financial Performance for the year ended 31 December 20X5
| $ | $ | |
|---|---|---|
| Sales revenue | 85,000 | |
| Less: Sales returns | (3,200) | |
| Net sales revenue | 81,800 | |
| Less: Cost of sales | (42,500) | |
| Gross profit | 39,300 | |
| Add: Other income | ||
| Commission income | 1,200 | |
| Discount received | 800 | |
| Interest income | 300 | 2,300 |
| Less: Other expenses | ||
| Wages and salaries | 12,000 | |
| Rent expense | 6,000 | |
| Bank charges | 300 | |
| Interest expense | 500 | (18,800) |
| Profit for the period | 22,800 |
| Account | $ |
|---|---|
| Service fee revenue | 45,000 |
| Commission income | 2,500 |
| Salaries expense | 18,000 |
| Rent expense | 6,000 |
| Utilities expense | 1,800 |
| Advertising expense | 900 |
Required: Prepare the Statement of Financial Performance for the year ended 31 March 20X5.
- Revenue: Service fee revenue $45,000
- Other income: Commission income $2,500
- Expenses: Salaries expense $18,000, Rent expense $6,000, Utilities expense $1,800, Advertising expense $900
Eastwood Learning Centre
Statement of Financial Performance for the year ended 31 March 20X5
| $ | $ | |
|---|---|---|
| Service fee revenue | 45,000 | |
| Add: Other income | ||
| Commission income | 2,500 | 2,500 |
| Less: Other expenses | ||
| Salaries expense | 18,000 | |
| Rent expense | 6,000 | |
| Utilities expense | 1,800 | |
| Advertising expense | 900 | (26,700) |
| Profit for the period | 20,800 |
Adding a "Gross profit" line for a service business. Service businesses do not sell goods — there is no cost of sales and no gross profit. Their Statement of Financial Performance goes straight from service fee revenue to other income and then expenses.
Placing "Sales returns" as an expense. Sales returns are a deduction from revenue — they appear before "Net sales revenue", not in the expenses section.
Placing "Other income" below the expenses section. Other income (commission income, discount received, etc.) is added to gross profit. It is not placed after expenses.