Single Step Income Statement
The income statement is an integral part of accounting, both personal accounting and business accounting. Income statements are broken down into the single-step income statement and multi-step income statement.
Let’s look at these different financial statements and assess the difference between single-step and multi-step income statement options. We’ll compare the benefits of the different methods and who should consider using which one. Which type of income statement you need can depend on these differences and how they apply to you.
What Does Single Step Income Statement Mean?
Single-step income statements are statements where all of the expenses, such as rent and the cost of goods sold, are grouped together in a single column.
This form of income statement doesn’t separate expenses into different categories, such as operating expenses, cost of goods sold, and other expenses. The single-step income statement shows the revenues, expenses, profits, and losses over a set financial period.
Income statements cover different time periods. Some show monthly statements, others show quarterly or annual figures. Some choose to stick to yearly figures, but other periods are available if needed. Don’t feel you only have access to yearly statements.
The other type of income statement is the multi-step income statement. These statements are better suited for larger organizations selling tangible goods. Single-step statements are preferred by small companies such as partnerships, sole proprietorships, and service-based companies.
Format and Preparation
The single-step income statement contains two categories; revenues (income) and expenses.
Revenue goes first on the statement and is put to the top of the left, depending on the format. Each category has just one subtotal to list. All the related revenues, such as consulting fees, service revenue, products sold, income from investments, etc. are listed under this single column.
The second column is dedicated to expenses. This column goes next to the income or to the side, depending on the format. This column contains all expenses under one heading. This format doesn’t differentiate between operating costs, cost of goods sold, and non-operating costs. Everything is grouped together under a single category.
You can calculate your pre-tax profit by taking the revenue and subtracting the expenses. You can include taxes to determine the total income from operations. Your net income for the period covered in the statement is the total income calculating money coming in after removing taxes and other items to reach a final figure.
Some smaller companies rely on this accounting method because it is simpler to create and easier for the average person to understand. At most, this form of income statement includes just a few broad categories for expenses and doesn’t go into much detail. You can save money on hiring an accountant by creating your own financial statements like this.
Single Step Income Statement Example
Here is a look at a sample income statement to give you an idea of what they look like;
For the year ended 31st December 2019
Cost of goods sold
Salaries and wager
Travel and entertainment
As you can see in the example, all of the revenues and expenses are listed under a singular heading. While this format is easier to understand for readers, it might not offer the information an external user needs. Public companies are encouraged, if not required, to use multi-step income statements. You’ll need the information of a multi-step statement to request a loan or entice investors to buy shares. Many people demand a more in-depth look at your finances.
Advantages and Disadvantages of Single-Step Statements
Whether you use a single-step or multi-step income statement depends on your business and needs. There are advantages and disadvantages to both methods. Here are some of the advantages and disadvantages of using a single-step income statement;
- You’ll get a simplistic view of all expenses and revenue for your business. The person reading the financial statement doesn’t need to be an expert to fully understand what the data means. They can still get a good grasp of the financial situation of a company and glean some useful information from the statement.
- The single-step statement still contains most of the important information needed. Most people could use this statement to get a general overview of the company without the need to dive further into specific details.
- Single-step statements are easier to generate. As such, a company can produce these statements without having to hire an expensive accountant to properly track all financial information and compile an income statement. This makes record-keeping easier in general and is why the model is preferred by small businesses.
- The simple nature of a single-step statement is a disadvantage as well as an advantage. They can be too basic and offer a simplistic overview of a company’s fiscal situation. As such, they don’t offer enough information for sophisticated investors to accurately analyze a business and determine if it is worth investing in.
- Single-step statements don’t offer enough information about operating margins and gross profit/loss margins. This means that it is difficult to identify unnecessary expenses in your business and make smart business decisions about how to handle them in the future.
- These statements don’t differentiate between a company’s primary activities and income generated from other sources. All sources are treated the same and grouped together under “revenues.” This can lead to investors misinterpreting or misunderstanding the financial situation of a company.
Differences between Single- and Multi-Step Income Statements
There are several differences between single-step and multi-step statements. Here are the key differences;
- A single-step statement calculates net income through a single step, hence the name “single-step income statement.” The statement subtracts expenses from revenue to reach a final figure. A multi-step statement incorporates other steps to determine the final net income.
- Single-step statements only show the net income of a business. On the other hand, multi-step statements show a gross profit on top of the net income for a clearer financial picture of the company.
- Single-step statements are generally used by businesses in the services industry. Multi-step statements are better for other businesses, such as those in the manufacturing business.
- The average single-step statement lacks important details, focusing on presenting a complete and concise picture. Multi-step statements go into deeper detail and offer a more comprehensive picture.
- A single-step statement considers the cost of goods sold to be a business expense. Multi-step statements don’t take this approach.
There are several key differences between the two methods. Whether you need to prepare single-step statements or multi-step statements depends on your business type and personal preferences. Some people need the extra detail offered by a multi-step system, but some businesses can get by on single-step statements.
The average single-step statement offers a simple and straightforward snapshot of a company’s finances, including profits and losses over a year. This limitation means that these statements are only suited for small organizations and for internal management in a bigger organization.
Large organizations can use these statements to get a glimpse of financial performance to put together a more effective budget for significant expense and revenue categories in an upcoming financial period. Large businesses can also combine single-and-multi-step statements to offer both a basic view and a more in-depth view for people who like having both to hand.