Preparing a single step income statement is easier than a multi-step income statement because it requires fewer calculations and there is no need to separate operating and non-operating income.
A single-step profit and loss statement contains less detail than a multi-stage profit and loss statement, which is easier to understand. It clearly shows the net profit, which makes it easy to get a basic idea of ​​how the business works.
What is an income statement?
The income statement is the sum of the company’s income and expenses over a period of time. It can be represented in two different ways: multi-step or single-step.
An example of a single step income statement is an income statement that shows only income less expenses and does not include gross profit. Only one subtraction is used to calculate net income.
Why is an income statement important?
The purpose of the income statement is to provide users with information about the profitability of the business for a certain reporting period.
However, there are two formats that can be used to prepare a profit and loss statement – single-step and multi-step – and many small business users are wondering which format their business should use. Although both formats have advantages and disadvantages, the choice of format depends on what you intend to use your income statement for.
What is a single step income statement?
A single step income statement is a method of compiling a profit and loss account where net income, revenue and expenses are grouped differently without further breakdown. This is usually done this way for simplicity. And it makes it easier for investors who read them and for accountants who prepare them.
Why do companies use a single-step income statement method?
Private companies use a single-step income statement method to prevent outsiders from accessing their full financial activities.
It is also used by private entrepreneurs, simple partnerships and other small businesses that provide services. On the other hand, public companies mostly use multi-stage profit and loss reporting.
By simply reviewing the income statement prepared using this method, a person without previous financial experience or knowledge can easily determine whether the company has made a profit or loss, but will not have details.
How does single step income statement work?
Although a single-step financial statement is a simple and basic way to present a profit and loss statement, it provides limited information and does not provide a detailed breakdown of the company’s operating activities. Because one general calculation is used, it is known as a one-step income statement.
This format may be acceptable and permissible for very small businesses, such as private entrepreneurs and companies. Some very small businesses may use a one-step income statement, although most companies and all public companies must use a multi-step income statement, as required by the Generally Accepted Accounting Principles (GAAP).
Example of single step income statement
An example of single step income statement can be seen in the equation or formula used to prepare it: Net income = (gains + revenue) – (losses + expenses)
Single step income statements calculate a company’s net profit by deducting losses and expenses from profits and income. These statements do not have a high level of detail and are useful in estimating profit or net income.
The single-step format is useful for taking snapshots of your company’s profitability, and not much else, so it’s not as common as a multi-step earnings report. But if you are looking for an extremely simple financial report to calculate the financial results of your company, one step is the way.
READ ALSO: Worst day to close on a house | what to look out for
What are the key features of a single step income statement?
Sales revenue
Any income statement starts with your company’s revenue. The way this metric is calculated will depend on whether you keep a cash or accrual method and how your company recognizes revenue, especially if you only calculate revenue for one month.
In general, this figure will simply represent your total income for any period of time covered by the income statement. (In this case, the time period is the year ending December 31, 2021.)
The cost of goods sold
Often reduced to “COGS”, this is how much it costs to produce all the goods or services you sell to your customers. If the company is engaged in service, this line can also be called the cost of sales. COGS includes only direct costs, such as raw material costs, labor costs and delivery.
A good example of single step income statement is if you roast and sell coffee like Coffee Roaster Enterprises, your income statement may include the cost of raw coffee beans, wages and packaging. Indirect costs, such as utilities, bank fees and rents, are not included in the SOGS – we categorize them seperately.
Gross profit
This is what you get if you subtract the total cost of COGS from income. Gross profit shows the profitability of your business after taking into account direct costs, but before accounting for overhead costs. This is a rough indication of how efficient your business is.
General expenses
These are also sometimes referred to as “operating costs” and include rent, bank and ATM costs, equipment costs, marketing and advertising costs, sales commissions, and any other costs you need to incur to support your business.
These costs are listed separately, but some income statements combine these and other similar costs into one broad category, called Sales, General and Administrative Expenses (SG&A). If the costs are not related to the main activity, they are known as “non-operating costs”.
Operating profit
Here’s how profitable your business becomes after deducting all the internal costs over which you have more control, but before taking into account external costs such as interest on loans and taxes that you control less. Accountants sometimes call this operating profit or operating income.
Interest costs
If your business owes someone money, they will probably have to pay interest monthly. Your interest expense is the total amount of interest payments that your business has made to its creditors during the period covered by the income statement.
Profit before income tax
This is the profitability of your business before paying taxes.
Net profit
Net income, also called “net sales” or “net profit”, is the total profit of your business.
How to prepare a single step income statement
The single-step format will have two major categories: income and expense. The income category will be first or top right, and there is only one subtotal for each category. All income, including income from services, consulting fees, investment income, etc., will be listed together under this.
The second category, related to expenses, will appear immediately below the category of income. All costs will be listed under this single heading. It does not differentiate between non-operating expenses, operating expenses or the cost of goods.
Profit before tax can be calculated by deducting expenses from income. Taxes are also taken into account for income from operations. Net income for the period will be total income from continuing operations, as well as the effect after taxes on unusual or extraordinary items.
Many smaller companies can use this method of reporting income statement because it is simpler and easier to understand. It is unlikely that more than a few major cost categories will be listed in one phase of the income statement.
READ ALSO: Bull Trap: Definition and how to avoid getting into one
Single step income statement vs multi step
Small business owners have two options when it comes time to report income. They can prepare a single step income statement or a multi step income statement.
The best choice between Single step income statement vs multi step for a company depends on the type of business and why it intends to use the income statement. Both of these profit and loss statements provide you with basic information such as expenses, income, and profit or loss for your business during the reporting period.
Single-step income statements calculate net income using a single equation, making them easier to use, but they still allow the company to see its profits or losses.
In contrast, the multi-step income statement uses three steps to calculate net income and separates non-operating and operating income and expenses.
What is best income statement option for your business?
Small businesses with a simple operating structure, including private entrepreneurs and partnerships, can choose between Single step income statement vs multi step income reporting.
Single step income statements are easier to prepare and require fewer calculations. For many small businesses, a one-step income statement contains all the details needed to assess your company’s financial condition.
However, if your small business is looking for a bank loan or looking to attract new investment, a multi-step income statement is the best option, as it provides potential lenders and investors with more detailed financial information about your business that can help them evaluate its long-term performance.
Single step income statement FAQs
Why is single step income statement mostly used for internal purposes?
Although single step income statement does not have detailed information, it is easy to prepare and easy to analyze. Therefore, it is most often used for internal purposes. In general, some companies may choose to use a combination of single and multi step profit and loss reporting for internal use. This method is slightly more detailed than a single-stage income statement, but not as detailed as a multi-stage income statement.
Why use single step income statement?
The single-step profit and loss statement offers several benefits for developers and users. For the preparer, this requires less detail and less calculation. He easily adds up all the revenue, sums up all the costs and subtracts the total costs from the total revenue to make a net profit. Only one income level is displayed for the user in the statement. If only one revenue figure is reported, the user is less confused by the figures.
