Single-Step vs Multiple-Step Income Statements

For a more readable format, try the multi-step format, which is the format of choice for larger and multi-department organizations. Smaller businesses may start reporting their financial results with a single-step income statement and then switch to the multi-step format once their operations become larger and more complex. Here’s how profitable your business becomes after deducting all the internal costs over which you have more control, but before taking into account external costs such as interest on loans and taxes that you control less. However, there are two formats that can be used to prepare a profit and loss statement – single-step and multi-step – and many small business users are wondering which format their business should use. Although both formats have advantages and disadvantages, the choice of format depends on what you intend to use your income statement for.

On the other hand, some investors may find single-step income statements to be too thin on information. The absence of gross margin and operating margin data can make it difficult to determine the source of most expenses and can make it harder to project whether a company will sustain profitability. Without this data, investors may be less likely to invest in a company, causing businesses to miss out on opportunities to acquire operating capital.

The other main financial statements are the balance sheet and the cash flow statement. It is essential to understand the difference between single-step and multiple-step income statements. Depending on the size and complexity of your business, one approach may be more beneficial than the other. Single-step statements are simpler to create and provide a quick overview of your financial performance. However, if you need more detailed information about your finances, multiple-step statements can give you this additional level of detail. The larger organization can use these to analyze a company’s performance for the financial period and set a budget for the major revenue and expense categories for the next financial period.

What is a Single Step Income Statement?

Furthermore, this statement also reveals non-operating items such as gains or losses from investments or extraordinary items like natural disasters that can significantly impact an organization’s financial performance. By breaking down operating and non-operating expenses and incomes, investors are able to get a clearer picture of the company’s overall profitability. The multiple-step statement lists each major category of income or expense separately, with subtotals for each type of income and expense.

Similarly, while a multiple-step statement can provide more detail, it may only be worth the extra time and effort if that detail is necessary for your purposes. When deciding which type of income statement to use, single or multiple steps, there are several factors to consider. The three main considerations are the complexity, time spent, and detail of the report. Non-operating expenses are the expenses that are not related to business activities such as interest expense, lawsuit, and loss on disposal of a fixed assets. Therefore, the net income factors in non-operating items such as interest expense, other non-operating costs such as non-recurring losses from inventory write-downs, and income taxes paid to the government.

• It’s also perfect for businesses that are just starting out, as it provides basic numbers without spending too much time or effort on calculations.
• The single-step income statement gives a straightforward summary of a business’s financial performance for a specific period of time, focusing on the profit earned.
• The Multi-Step Income Statement is a financial reporting format where a company’s revenue, costs, and expenses are classified into separate categories before arriving at net income (the “bottom line”).
• If your business model has a lot of different expenses, you might not get an accurate number.
• The total of these expenses are subtracted from the total of incomes reported above of these expenses and net income or net loss is arrived at.

This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others.

Why You Should Use a Single-Step Income Statement in Your Business

Gross profit shows the profitability of your business after taking into account direct costs, but before accounting for overhead costs. The single-step format is useful for taking snapshots of your company’s profitability, and not much else, so it’s not as common as a multi-step earnings report. But if you are looking for an extremely simple financial report to calculate the financial results of your company, one step is the way. Private companies use a single-step income statement method to prevent outsiders from accessing their full financial activities.

What’s Reported on a Multi-Step Income Statement?

Besides the main revenue source, company may generate other incomes that are not the main business activities. These incomes include the sale of fixed assets, Interest income from a cash deposit, revaluation gain, gain on exchange rate, and so on. Investors also use the gross profit to determine the profitability of primary business activities and the general health of the company. When calculating gross profit, top 10 business blogs and why they are successful no other expenditures are included apart from the cash inflow from the sale of goods and cash outflow from the purchase of goods. Gross profit is the first section of a multi-step income statement, and it is obtained by deducting the cost of goods sold from the total sales. Gross profit is used by creditors to show the company’s ability to meet arising debt obligations and to pay back outstanding credit.

Which income statement format should you use?

In summary, the Single Step Income Statement offers a simple, transparent way to assess the profitability of a company, but it lacks the level of detail often required for comprehensive financial analysis. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. What you need to do depends on your type of business, so consult with an accountant or other professional if you have questions about how to use the numbers in your one-step statement. Other income, non-operating income, or other income might imply the same kind of income that the entity is generating from its main operation.

Fundamentally, the basic premise of either presentation format is conceptually the same, granted the outcome of either method is to arrive at net income. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.

Preparing a single step income statement is easier than a multi-step income statement because it requires fewer calculations and there is no need to separate operating and non-operating income. A single-step income statement is perfect for businesses that don’t have complex financials, such as retailers. Operating expenses and non-operating expenses are recorded in the expenses all together in the single-step income statement.

It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses. The income statement focuses on the revenue, expenses, gains, and losses reported by a company during a particular period. The multi-step income statement breaks down operating revenues and operating expenses versus non-operating revenues and non-operating expenses.

These are all expenses that go toward a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses toward lawsuits. Payment is usually accounted for in the period when sales are made or services are delivered. Receipts are the cash received and are accounted for when the money is received. The single-step income statement is the most simplified version of the income statement.

What you do with this information is up to you, but it’s good to have some numbers at the start of your business. To see our product designed specifically for your country, please visit the United States site.

What is your current financial priority?

A single-step income statement offers a simple report of a business’s profit, using a single equation to calculate net income. A multi-step income statement, on the other hand, separates operational revenues and expenses from non-operational ones and follows a three-step process to calculate net income. Income statements, also called profit and loss statements, are one of the major financial statements prepared by businesses. A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads.