There are two reporting options available for businesses when preparing an income statement: a single-step and multi-step. The format you choose will depend on the purpose of the income statement and the type of business you own. Both these types of income statements report on the profits, expenses, and revenues of the business during a specific period.
- There are two reporting options for businesses: single-step and multi-step income statements.
- Both single-step and multi-step income statements report on the profits or losses, expenses, and business revenue.
- The type of income statement you choose depends on the level of financial detail you are looking for, and the type of business you operate.
- Single-step income statements use a single calculation to calculate net income.
- Multi-step income statements follow a three-step process to calculate net income.
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.
A single-step income statement offers a simple accounting method for the financial activity of a business, making it easy to prepare and understand.
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:
- Gross profit = Net sales - cost of goods sold (COGS)
- Operating income = Gross profit - operating expenses
- Net income = Operating income + non-operating 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.
Unlike a single-step format, multi-step formats don’t only focus on net income but offer an additional level of detail by calculating two more income-related figures.
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:
|Cost of Goods Sold||$75,000|
|Office Supplies Expense||$3,500|
|Office Equipment Expense||$2,500||$6,000|
|Total Operating Expenses||$13,000|
|Non-Operating or Other|
|Gain on Sales of Investments||$3,000|
|Loss From Lawsuit||($1,500)|
Here is an example of a single-step income statement, showing a much simpler format:
|Revenues & Gains|
|Gain on Sales of Assets||$3,000|
|Total Revenue & Gains||$108,000|
|Expenses & Losses|
|Cost of Goods Sold||$75,000|
|Office Supplies Expense||$3,500|
|Office Equipment Expense||$2,500|
|Loss From Lawsuit||$1,500|
|Total Expenses & Losses||$90,000|
A third type of income statement is called a “comprehensive income statement” reports on certain gains and losses that are not included in the business’s net income.
Choosing a Single-Step vs. Multi-Step Income Statement
|Multi-Step Format||Single-Step Format|
|Takes more time to prepare.||Easy to prepare.|
|Uses multiple calculations to show itemized breakdowns of expenses and revenue.||Uses a single calculation to show net income.|
|Ideal to use for complex business structures or to attract new investment.||Ideal for companies with a simple structure such as partnerships or sole proprietors.|
When it comes to comparing a multi-step income statement vs a single-step statement, it is important to consider the type of business you operate. Small businesses without a complex operating structure, such as partnerships and sole proprietorships, can often choose a single-step income statement as it requires significantly fewer calculations and is easier to prepare.
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.
Frequently Asked Questions (FAQs)
What is the advantage of single-stepping?
One of the most important advantages of single-stepping when creating an income statement is that this single-step format is very easy to prepare. It focuses on net income, so it is especially helpful if you need to make an assessment that is based on your business’s bottom line.
What is a multi-step income statement?
A multi-step income statement uses an itemized list of revenues and expenses. It breaks down expenses and revenues that are directly related to the business’s operations versus those that aren’t.
What is the difference between a single step and a multi-step income statement?
A single-step income statement focuses on reporting the net income of the business using a single calculation. A multi-step income statement is more detailed and calculates the gross profit and operating income of the business using multiple calculations and an itemized breakdown.