What is an income statement?
The income statement is one of three key financial statements used by all companies, from small businesses to large corporations. A basic income statement along with your cash flow statement and balance sheet gives you a complete insight into your company’s financial position.
People with small businesses need two types of income statements. They can choose between them:
- Single-step income statement
- Multi-step income statement
|Single-step statement of income||Multiple-step statement of income|
|This type of income statement is a simple report of a business’s profit over a specific period and uses only a single equation to calculate net income.||This type of income statement differentiates operational and non-operational revenues over a specific period and follows a three-step process to calculate a net income.|
The Single-step format and multi-step format are different depending on the type of business you are running.
Before comparing the two, we first have a look at the term income statement.
This article covers:
- What’s the income statement?
- What’s a single-step income statement
- What’s a multi-step income statement
- Single-step income statement VS multi-step income statement
- Example of the single-step income statement
- Example of the multi-step income statement
- Which one is preferable?
Single-step or multi-step income statement
What is the income statement?
An income statement is a financial document a company prepares to describe its business activities and updates over a given time. It is a kind of financial report a company generates.
- Profit or loss
What’s a Single-step income statement?
A single-step income statement focuses on revenue, expenses, and the profit or loss of a business. All of this is possible by using a single equation.
The equation states:
Net income = (revenue + gains) – (expenses + losses)
This statement is straightforward and easy to go with while preparing the financial activity of your business.
What’s a Multi-step income statement?
A multi-step income statement also focuses on revenue, expenses, and the profit or loss of a business. Still, it uses multiple equations to calculate the net income or yield of the company.
It split down the operational and non-operational revenues and expenses.
Operating expenses and revenues:
Revenues and expense that link with the business.
Non-operating expenses and revenues:
Revenues and expense that are not linked directly to the business.
Three different equations under the multi-step income statement are:
- Gross profit = net sales – cost of goods sold.
- Operating income = gross profit – operating expense
- Net income = operating income + non-operating items
Single-step vs. Multi-step income statement:
A single-step income statement is a single-step process, whereas a multi-step income statement is a three-step process to calculate the company’s net income and profit.
Advantages of a single-step income statement:
It is :
Quick to prepare:
It involves only one calculative equation. And it’s not necessary to break down operational and non-operational revenue in this process. That’s why it’s easy to prepare.
Its simplicity makes it easy for a person to read it. As it only focuses on the bottom line, net income.
Advantages of a multi-step income statement:
The multi-Step income statement has the following advantages:
Offer great analysis:
It gives a breakdown of operating and non-operating income statements to analyze in detail.
Indicate gross profit:
A multi-step income statement helps to give an insight into gross profit, how a business uses labor and supplies to generate revenue.
Evaluate operating income:
A multi-step income statement evaluates how a company earns a profit from its initial business activities.
Disadvantages of a single-step income statement:
- Lack of detailed information
- Absence of gross income details
- Unable to attract investors on first sight
- Causing business to miss out on an opportunity
Disadvantages of a multi-step income statement:
- Stressful for accounting teams
- Demand extra care while dealing with calculations
- A single mistake can cause a significant loss to the business.
Example of a single-step income statement:
This example of a single-step income statement gives you an insight into the final report.
Example of a multi-step income statement:
This example of a multi-step income statement gives you an insight into the final report.
Which one is preferable:
(A single-step or a multi-step income statement)
- It is recommended for a small business to opt for a single-step income statement as it gives all the details regarding financial health only.
- On the other hand, if small businesses are taking loans and attracting new investments, it is recommended to opt for a multi-step income statement. It gives a detailed financial insight into your business.
- Both ways are best to use while running a small business. It just depends on the dealing and business approach, which makes the difference.
Hopefully, this article will help you choose the best way to make an income statement for your business.