Single-Step vs. Multiple-Step Income StatementsWhat’s the Difference?

Written By:
Lisa Borga

Small business owners have two choices when it comes time to prepare an income statement.

They can prepare a single-step income statement or a multi-step income statement.

The best choice for a given company depends on the type of business it is and what it intends to use the income statement for.

Both of these income statements give you basic information, such as expenses, revenues, and the profits or losses your business made during the accounting period.

However, they do have some differences.

What is a Single-Step Income Statement?

Single-step income statements compute net income with a single equation making them easier to use, and yet they still allow a business to see its profits or losses.

In contrast, a multi-step income statement uses three steps to compute the net income and separates the non-operational and operational revenues and expenses.

A single-step income statement lists the revenue and expenses and uses this information to calculate the net income or net loss.

For the single-step income statement, one equation is used to calculate the net income or the net loss. The equation used to calculate net income is listed below.

Net Income = (Revenues + Gains) – (Expenses + Losses)

The single-step income statement is an easy way to see the profit or loss of your business in an easy-to-understand format.

What is a Multi-Step Income Statement?

A multi-step income statement will provide most of the basic information you will get in a single-step income statement.

However, it calculates the net income or net loss for the business by using three equations instead of one.

A multi-step income statement gives the details of the operating expenses and operating revenues as well as the non-operating expenses and revenues.

It separates the revenues and expenses into two different categories, one for those that are a direct part of the company’s operations and the other for those that are not directly related to the company’s operations.

The multi-step income statement uses three formulas to calculate the net income:

1. Gross Profit = (Total Sales – Cost of Goods Sold)

In this step, you subtract the cost of goods sold from the net sales to obtain the gross profit.

2. Income From Operations = (Gross Profit – Operating Expenses)

For this step, you subtract operating expenses from the gross profit to get the operating income.

3. Net Income or Net Loss = (Operating Income + Non-operating Items)

Add the operating income to the net non-operating expenses and losses as well as the gains and revenues to obtain the net income or loss.

Single-Step vs. Multi-Step Income Statement

A single-step income statement does not separate revenue or expenses into operational and non -operational categories.

It also used a simpler equation to arrive at the net income.

A multi-step income statement shows the subtotals that are used to obtain the net income of your business, which can help give you a better idea of how your business is generating its income.

Benefits of Using Single-Step Income Statements

• Makes Preparation Easier: Preparing a single-step income statement is easier than a multi-step income statement due to requiring fewer calculations and not needing to separate operating and non-operating income.
• Easier to Understand: The single-step income statement gives fewer details than a multi-step income statement, which makes it easier to understand. It clearly shows net income, which makes it easy to get a basic idea of how a business is doing.

Benefits of Using Multi-Step Income Statements

• Shows More Detail: A multi-step income statement gives a detailed look at the expenses and revenue of a business. It also separates operating and non-operating income, which can be helping in analyzing the health of your business.
• Provides Gross Profit: A multi-step income statement reports gross profit, which is something a single-step income statement does not do. This can be helpful in evaluating a business because it indicates how well a business makes use of its workers and its equipment to produce revenue.
• Reports Operating and Non-Operating Income Separately: Unlike the single-step income statement, the multi-step income statement shows operating and non-operating income separately. This can be helpful because it can give a business a better idea of how well it is doing at making a profit from its primary business activity.

Example of a Single-Step Income Statement

This is an example of an income statement and shows some of the common items you’ll find on an income statement.

Example of a Multi-Step Income Statement

The example below shows a multi-step income and the increased detail that it involves.

Which Type of Income Statement Should I Use?

A small business that has a simple operating structure, such as partnerships or sole proprietorships, could use either single-step or multi-step income statements.

A single-step income statement will be easier for a small business to prepare, which could be an important consideration for some small businesses.

Yet, a single-step income statement could still provide all of the information a small business would need to see how it is doing.

But, there could be times when a small business may want to use a multi-step income statement.

For a small business that is trying to persuade people to invest in their business or trying to obtain a bank loan, a multi-step income statement may be a better choice.

A multi-step income statement provides a lot more financial details about a business which can give investors or banks a better idea about the financial condition of your business.