What Is a Single-Step Income Statement?
Single-step income statements report the revenue, expenses, and profit (or loss) of a business during a specific period. However, the net income is reported using only one equation. The equation used in a single-step income statement is: Net income = (gains + revenue) - (losses + expenses) Single-step income statements calculate the business’s net income by subtracting losses and expenses from gains and revenue. These statements don’t have a high level of detail and are useful when making an assessment that depends on profits or net income. Use a single-step income statement if:
You need a simple statement that reports the net income of a business.Your business does not have complex operations.You don’t need to separate operating expenses from the cost of sales.
Disadvantages of Single-Step Income Statements
Single-step income statements aren’t very helpful for financial decisions that require more in-depth information about a business’s financial health than simply looking at its net income. When assessing a business’s financial performance, you’ll need more than just a single-step income statement.
What Is a Multi-Step Income Statement?
A multi-step income statement includes much of the information found in a single-step format, but it makes use of multiple equations to determine the profit, or net income, of a business. Multi-step income statements break down operating expenses and operating revenues versus non-operating expenses and revenues. This process separates expenses and revenues directly related to the business’s operations from those not directly related to its operations. Multi-step income statements use three accounting formulas to calculate a business’s net income: A multi-step format offers more detail and an itemized listing of expenses and revenue that is broken down further into specific categories. It calculates the gross profit by subtracting the cost of goods sold from the net sales and also calculates the operating income by subtracting operating expenses from the gross profit. Use a multi-step income statement if:
You have a bigger company and you need more detail in your income statements.You need to report on gross profit. This is an important metric because it shows how effectively labor and supplies are used to generate revenue.You need to report on operating income. This gives more insight into how effectively the business is generating a profit from its main activities.
Disadvantages of Multi-Step Income Statements
The amount of detail provided in multi-step formats can be a drawback as it’s a time-consuming and more complex way of preparing an income statement compared to using a single-step format.
Multi-Step vs. Single-Step
Here is an example of a multi-step income statement, showing significantly more detail than a statement using the single-step format: If your business is looking to apply for a loan or attract new investment, a multi-step income statement is the best option as it provides investors and creditors with greater financial detail about your business.
