Single-Step Income Statement Definition, Pros & Cons, Types

The single-step income statement is a more straightforward and uncomplicated report to prepare. Also, the single-step report it’s easier for readers without financial expertise to interpret, analyze, and understand. Find out the accounting equation to compute the net profit using the single-step income statement and examples of single-step income statement. The revenue category will come first or right at the top and there is only one subtotal for each category. All the revenues including service revenue, consulting fees, investment income, etc. will be listed together under this one.

The third and final component of the multi-step income statement is net income (the “bottom line”), which represents the net profitability of a company per accrual accounting standards. Single-step income statement is one of the two commonly used income statement formats, the other being the multi-step income statement. The net income calculated using the single-step income statement is equal to that which is calculated using a multi-step income statement.

In a single-step income statement, the operating revenues are recorded in the revenues section, including other income. An income statement provides valuable insights into various aspects of a business. It includes readings on a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers. Although this statement provides some necessary information about the company’s finances, it does not provide extensive details about ABC Company’s gross profit and operating profit.

• Reducing total operating expenses from total revenue leads to operating income (or loss) of $69.92 billion ($168.09 billion – $98.18 billion).
• This is great for simplicity’s sake, but it doesn’t give the external users of the financial statements much information about the company operations.
• They’re also helpful after a business has been operating for some time, as they make it easy to compare different periods (such as comparing fiscal year to fiscal year results) by showing the basic calculations.

It indicates that Walmart incurred much higher cost than Microsoft to generate equivalent sales. To understand the above formula with some real numbers, let’s assume that a fictitious sports merchandise business, which additionally provides training, is reporting its income statement for a recent hypothetical quarter. Also called other income, gains indicate the net money made from other activities, like the sale of long-term assets.

Create a Free Account and Ask Any Financial Question

Non-operating expenses are the expenses that are non-related to the entity’s daily operation. For example, interest expenses and other expenses that spend by the entity like selling of fixed assets. These expenses are recorded in the expenses section with other operating expenses of a single-step income statement. Operating revenues are the revenues that an entity generates from its normal business activities.

The single-step income statement offers a straightforward accounting of the financial activity of your business. All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting understanding financial statements Standards Board (FASB). Many private companies elect to follow GAAP, even though they aren’t legally obligated to do so. In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured.

All types of expenses are recorded under this section and subtotal into one line in the expenses section. A comparison of the line items indicates that Walmart did not spend anything on R&D and had higher SG&A and total operating expenses than Microsoft. A business’s cost to continue operating and turning a profit is known as an expense. Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines. 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. Operating revenue is realized through a business’ primary activity, such as selling its products.

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

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. Single-step income statements are a good reporting method for small organizations with simple operations. They offer less details about a company’s financial activity, but they’re easier to prepare and straightforward to read. 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. An income statement is an essential financial document a company prepares to describe its business activities over a given reporting period.

The components of the multi-step income statement comprise three equations that calculate a profit metric that each measures a unique attribute of the underlying company’s financial performance. Multi-step statements are more detailed and segmented according to types of income and expenses, which show how a business progresses toward net income, or in some cases a net loss. A single-step format is a quick rundown of a business’s activity, almost a back-of-the-envelope calculation. Income and expenses aren’t sorted by whether they’re an operating expense or non-operating expense, and operating expenses aren’t sorted by production costs or overhead.

Income Statement: How to Read and Use It

A single-step income statement will hardly list more than a few major categories of expenses. The pre-tax profit can be calculated by subtracting the expenses from the revenues. The net income for the period will be the total income coming from the continuing operations and the after-tax effects of unusual items or extraordinary items. Starting off, the gross profit is equal to the revenue generated by a company in a pre-defined period minus its cost of goods sold (COGS), which are the direct costs incurred as part of its core business operations. The multi-step income statement is a method of presenting the financial results of a company by segmenting the revenue, costs, and expenses into distinct sections.

Next in your single-step income statement, you’ll need to create the first main section of the report, Revenues. The Revenues section covers the top portion of the report, with the Expenses section directly below it. Enter each of the revenue line items your business has to report and then add them up to find the revenue subtotal.

A single-step income statement offers a simple accounting method for the financial activity of a business, making it easy to prepare and understand. 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. However, where the business decides to get bank loans or new investment for their expansion multi step income statement is the best option as it provides detailed insights into the entity’s financial stability.

What Is a Single-Step Income Statement?

A company’s income statement will show the revenues, expenses, and profit or losses in a financial period. The financial period of a company can vary from being monthly, quarterly, or semiannually to even a full year. In short, the introduction of stakeholders for the first time is typically the catalyst for private companies to transition from the single-step to multiple-step income statement.

Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services. The calculation of net profit involves deducting the company’s total expenses from the total revenue. For instance, as per the snapshot above, the net income for ABC Company for the year 2019 is a total of $32,800 ($42,000 – $9,200).

We can see from above example that all revenues/incomes are listed into one main category called ‘revenue’ irrespective to the sources from which they are received. Likewise, expenses are reported into one main category called ‘expenses’ and no classification of these expenses according to their purposes etc. are made. We have already discussed in detail that income statement is the first report in financial statements preparation . Its main purpose is to find out the accurate net income or net loss at the end of accounting period. Small companies with simple operations may find single-step statements sufficient. The owners of sole proprietors and partnerships are more likely to opt for single-step statements.