Single-Step vs Multi-Step Income Statement: Key Differences for Small Business Accounting

To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections. This sample multi-step income statement from Accounting Coach shows the layout of a multi-step income statement with the separation between operating and non-operating activities. In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities. Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.

A very small business like a sole proprietorship is more likely to prepare a single step income statement. Many small businesses and larger companies prepare multi-step income statements. The siloed breakdowns in multiple-step income statements allow for deeper analysis of margins and provide more accurate representations of the costs of goods sold. Such specificity gives stakeholders a sharper view of how a company runs its business, by detailing how the gross, operating, and net margins compare.

Are You Looking For an Accounting Software?

We will discuss the formula for the same in the following topic of this article. Large businesses are the most likely to prepare a multiple step income statement. These statements are ideal for businesses with variety in their income and expenses. One example of a business that benefits from a multi step income statement is a manufacturing company. These companies have several revenue sources because they deal with many companies. They should keep a multi-step income statement to get a clear difference between the primary and non-primary business activities.

Preparing the multi-step income statement is beneficial for medium to big corporations to keep track of their income. As the revenue and expenses are segregated into operating and non-operating accounts, it provides greater insight into the company’s financial performance. Right after computing the total operating income, the other revenues and expenses section is the revenue and expense incurred from non-operating activities. Businesses that use multi-step income statements are typically larger and more complex companies. When it comes to a publicly-traded company, they are required by law to file a multi-step income statement to give greater detail to the users of the financial statement. A multiple-step income statement presents two important subtotals before arriving at a company’s net income.

Create a free account to unlock this Template

As such, this website will cover a variety of topics aimed to help you have a successful life and career. Keep an eye out in the financial footnotes of the statement and annual report, as any change like this would be disclosed there. There are three formulas you need to use for this method of calculating net income. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Lastly, you can see the non-operating and other section being subtracted to compute the net income.

For example, our retailer isn’t in the business of receiving insurance proceeds. If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales. It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. Investors also use the gross profit to determine the profitability of primary business activities and the general health of the company.

Non-operating items, including non-operating revenues, non-operating expenses, and non-operating gains (losses), are shown separately from operating revenues and operating expenses. With this separation in financial reporting, you can analyze ongoing business operations separately from non-operating items. Single step vs multi step income statements means the difference between simple and detailed income statements.

Step 5: Calculate Income before Taxes

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. The net profit shows the company’s net profitability after deducting the operating expenses and expenses such as taxes and interest paid on debts. With the calculation of operating income, you are able to analyze the operations of the business. In contrast to a multi-step income statement, the Dana Incorporated income statement is single-step mainly.

The statement also separates operating expenses into selling and administrative expenses. The first step to creating the statement is gathering the necessary information. The adjusted trial balance is a listing of the company’s accounts and their balances after adjusting journal entries have been made. Other sources of information for the statement might include, for example, documentation that details the company’s core business activities so as to differentiate between operating and non-operating items. A single-step income statement focuses on reporting the net income of the business using a single calculation.

Disadvantages of Multiple-Step Statements

This section not only helps measure the profitability of the core business activities, it also helps measure the health of the business. This figure is found by subtracting the remaining operating expenses from gross profit. Operating expenses are costs that are incurred to support the company’s regular accounting articles operations. The report will reflect the breakdown of the company’s revenue and expense accounts into operating and non-operating business activities in every multi-step income statement. Hence, it provides readers in-depth details of the income and expenses incurred during business operations.

• Margin of safety is the amount of a company’s profit after subtracting its break-even point.
• Multi-step income statements also typically include several non-operating items, such as interest expense and income taxes.
• The line items could be misleading if management tries to move expenses from cost of goods sold into operating expenses.
• This sample multi-step income statement from Accounting Coach shows the layout of a multi-step income statement with the separation between operating and non-operating activities.
• Accounting teams need to be robust to correctly account for the line items and classifications of revenues and expenses.
• The classified income statement subdivides operating expenses into selling and administrative expenses.

If a company’s operations are strong, it will almost always show a profit at the bottom line, but not all companies with a profitable bottom line have strong operations. It might have lost money from its operations but had a huge insurance settlement that pushed a profit to the bottom line. At the top of the income statement is where you put the total operating activities. Start by adding the operating revenues to the document, which is how much money you generate through selling goods and services across the period.

Should I Prepare a Single-Step or Multi-Step Income Statement?

This could be considered a form of financial statement fraud, and can only be perpetrated when the multi-step format is used, since readers are focusing on the content of the presented subtotals. The Gross profit part of a multi step income statement shows Net Revenues (Net Sales and Net Service Revenues) minus Cost of goods sold. The Operating income part lists operating expenses and subtracts them from Gross profit to equal Operating income. The net income line is calculated as Operating income less net Non-operating expenses.

These statements don’t have a high level of detail and are useful when making an assessment that depends on profits or net income. The statement shows the line items gross profit and operating income, which are metrics commonly looked at by management, investors, and creditors. As discussed above, we saw how multi-step income statements are useful for investors and creditors to get a detailed insight into a company’s financial performance and its pros and cons.

An income statement is an essential financial document a company prepares to describe its business activities over a given reporting period. This financial summary of a company’s revenue, expenses, and earnings are typically presented as part of a package that also includes a company’s balance sheet and cash flow statement. One of the top three financial statements, the income statement measures company performance. Also known as a profit and loss statement, the income statement provides an overview of revenues and expenses incurred during a specific period of time. The operating section is subdivided into two main sections that list the primary business income and expenses. The first section computes the gross profit of the business by subtracting the cost of goods sold from the total sales.

• The income statement for a merchandiser is expanded to include groupings and subheadings necessary to make it easier for investors to read and understand.
• A single-step income statement offers a simple accounting method for the financial activity of a business, making it easy to prepare and understand.
• You can also include taxes in this section, or if you’re looking to create EBIT (earnings before income taxes), you can create a separate section for taxes.
• This simplified approach makes record-keeping easier for both the accountants who prepare the statements and the investors who read them.
• For many small businesses, the single-step income statement provides all the details you’ll need to assess the financial health of your company.

It provides a more detailed breakdown of expenses than a single-step income statement and uses a variety of equations to determine the net income of a business. A multi-step income statement also differs from an income statement in the way that it calculates net income. A single-step income statement includes just one calculation to arrive at net income.