As a small business owner, it's crucial that you keep track of how much money you're making — a key indicator of your company's success. An income statement provides an accurate report of your earnings, expenses, and revenue. There are two primary types of income statements you can choose from: single-step income statements and multi-step income statements.
Which income statement is right for you? It depends on various factors, including the size of your business and the type (e.g., whether you run a service- or product-based company). The purpose of the income statement is another consideration. Will the statement be used exclusively for internal purposes or do you want to share it more widely, for example with external investors?
Whichever option you choose, up-to-date record-keeping of your income and expenses will be the first step in creating an accurate income statement. Skynova's accounting software can help you track and manage this financial data, ensuring no details fall through the cracks.
Read on to find out more about the difference between single-step and multi-step income statements and get some guidance on how to figure out which option is right for your business.
What Is a Single-Step Income Statement?
A single-step income statement presents a simplified overview of a business's revenue, expenses, and net income. All revenue and gains are displayed at the top of the statement. All expenses and losses are displayed below this. These two elements are then used to calculate the net income, which is displayed at the very bottom. Here's the formula used:
| (Revenues + Gains) |
| − (Expenses + Losses) |
| = Net Income |
A single-step income statement offers an easy-to-read snapshot of a company's performance and bottom line. Accountants and investors can quickly see all of the gains and losses. Shareholders can immediately zone in on the net income to quickly determine how well the company is performing financially.
Single-Step Income Statement Format Example
A concrete example can help demonstrate the simple and streamlined nature of a single-step income statement. Here's what this document might look like:
|
Bob's Building Supplies & Contracting, Inc. Income Statement Quarter 2, Apr to Jun 2021 |
|
|---|---|
| Revenues & Gains | |
| Sales revenues (what Bob earned from the sale of products like lumber, tools, etc.) | $200,000 |
| Interest revenues (what Bob earned from interest in business bank deposits) | $5,000 |
| Gain on sales of assets (what Bob earned from selling some depreciated machinery assets to a scrap shop for a small profit) | $1,000 |
| Total Revenue & Gains | $206,000 |
| Expenses & Losses | |
| Cost of goods sold (how much money Bob spent producing the goods he sells — for example, he obtains, preps, sands, and stains the lumber he sells) | $150,000 |
| Office supplies expense (Bob has a back office where he manages the administrative part of his business) | $5,000 |
| Advertising expense (Bob pays for ad billboards all over the region) | $10,000 |
| Interest expense (Bob borrowed $10,000 from the bank because of cash flow issues at an interest rate of 10%. He owes $1,000 per month in interest) | $3,000 |
| Loss from lawsuit (Bob got sued for selling rotten lumber to someone) | $3,000 |
| Total Expenses & Losses | $171,000 |
| Net Income | $35,000 |
What Is a Multi-Step Income Statement?
A multi-step income statement provides additional details lacking in single-step income statements, categorizing expenses as direct or indirect costs.
Direct costs are also known as non-operational costs and refer to expenses for a certain project, product, or service. Indirect costs are also known as operational costs and refer to generalized expenses related to a business's broader operations, which can't be attributed to a certain project, product, or service. Examples include employee salaries, research and development, marketing expenses, and infrastructure costs like rent, utilities, and phone services.
This more specific breakdown allows for a more in-depth analysis of a business's earnings, with a detailed comparative breakdown of gross, operating, and net profit margins. This added information can interest stakeholders who want to know more about how a company operates its business. A multi-step income statement uses three distinct formulas to present gross profit, operating income, and net income.
Here's the formula for gross profit:
| Net Sales |
| − Cost of Goods Sold (COGS) |
| = Gross Profit |
Here's the formula for operating income:
| Gross Profit |
| − Operating Expenses |
| = Operating Income |
Here's the formula for net income:
| Operating Income |
| + Non-Operating Items |
| = Net Income |
Multi-Step Income Statement Format Example
A concrete example can help demonstrate the more detailed nature of a multi-step income statement. Let's say that Bob decides that he wants more detailed financial insights into his business in the next quarter. Here's what this document might look like:
|
Bob's Building Supplies & Contracting, Inc. Income Statement Quarter 2, Apr to Jun 2021 | ||
|---|---|---|
| Sales | $200,000 | |
| Cost of goods sold | $100,000 | |
| Gross Profit (sales minus COGS) |
$100,000 | |
| Operating Expenses | ||
| Selling expenses | ||
| Advertising expenses | $20,000 | |
| Administrative expenses | ||
| Office supplies expense | $5,000 | |
| Total Operating Expenses | $25,000 | |
| Operating Income (gross profit minus operating expenses) |
$75,000 | |
| Non-Operating or Other Interest Revenues | $5,000 | |
| Interest expense | $3,000 | |
| Total Non-Operating | $2,000 | |
| Net Income (operating income plus non-operating or other interest revenues) |
$77,000 | |
What Is the Difference Between a Single- and Multi-Step Income Statement?
While single-step income statements provide a quick snapshot of a company's revenue and expenses, multi-step income statements provide a more in-depth look, including a breakdown of gross profit, operating income, and net income.
Read on for a list of pros and cons for each option.
Pros and Cons of Single-Step Income Statements
Understanding the advantages and disadvantages of single-step income statements can help you determine if this is the right option for you.
Pros:
- Provides a quick look at your business revenue and expenses
- Simplifies record keeping for investors and accountants
- Faster and easier to generate than multi-step income statements
Cons:
- Lacks the detail and specificity of multi-step income statements, failing to provide context and key metrics like gross profit, net income, and operating income
Pros and Cons of Multi-Step Income Statements
Like single-step income statements, multi-step income statements have their benefits and drawbacks.
Pros
- Gives a detailed breakdown of operating versus non-operating income
- Provides a more in-depth overview of a company’s financial health, including information like cost of goods sold, gross profit, net income, and operating income
- More granular data makes it easier for investors to get context-driven, comprehensive insights into a company’s financial health
Cons:
- Time-consuming, laborious, and complicated to create
- Overwhelming for investors lacking financial expertise to read
How Do You Create a Multi-Step or Single-Step Income Statement?
Whether you opt for a multi-step or single-step income statement, you need granular data regarding income and expenses to draft this documentation. Skynova's accounting software can help you track your financial data and be used to automatically generate financial reports, including income statements. Read on to find out how it's done.
Choose a Reporting Period
A financial reporting period, also called an accounting period, refers to the timespan your income statement will cover. Most businesses use monthly, quarterly, and/or annual reporting periods. More frequent reporting allows you to better track your business's success over time, identifying trends that can help you make smart business decisions.
Create a Trial Balance Sheet
A trial balance sheet is an internal document that presents the end balance of each business account for the defined reporting period. You will need these end balance figures to create your income statement. You can create your trial balance report using Skynova's accounting software.
Calculate Revenue
Determine your total sales revenue in your defined reporting period. This should include money from all sales of goods and services, even if it hasn't been paid yet. If you've invoiced a client for a service but they haven't paid the invoice yet, this still counts toward revenue. Skynova's business templates can help you send, manage, and track invoices. Enter the total amount of revenue in your income statement.
Add Up the Cost of Goods Sold
The cost of goods sold (COGS) includes direct labor, materials, and overhead expenses your business has incurred to provide its goods or services. Add up all of these costs on your trial balance sheet. The total COGS should be entered on the income statement.
Calculate the Gross Margin
For a multi-step statement, calculate the gross profit using the aforementioned formula:
| Net Sales |
| − Cost of Goods Sold (COGS) |
| = Gross Profit |
Add Up Operating Expenses
Add up your operating expenses, including both selling and administrative expenses. In a multi-step income statement, you need to differentiate expenses as direct (operational) costs versus indirect (non-operational) costs (e.g., employee salaries, marketing, rent). For a multi-step statement, calculate the operating profit using the aforementioned formula:
| Gross Profit |
| − Operating Expenses |
| = Operating Income |
Calculate Income With Income Taxes
To calculate your income, subtract your expenses (selling and administrative) from your gross profit total. Note that this is the pre-tax income. You have to enter this amount in the statement. To calculate your income tax, you then multiply your state's relevant taxes by your pre-income tax outcome. This should be added to the income statement below the pre-tax income number.
Determine Net Income
You can now go ahead and determine your business's net income. To do this, you will need to know how much income tax you have to pay — as calculated in the step above. Take that number and subtract it from your previously calculated pre-tax income. The resulting figure is your net income.
Finalize Your Income Statement
Once you've finalized your income statement using Skynova's accounting software, you can easily save it as a PDF or print it out. You can also send a copy directly to your accountant or bookkeeper via Skynova.
What Type of Income Statement Should My Small Business Use?
For smaller businesses with a simple operating structure (such as sole proprietorships or partnerships), a single-step income statement is usually sufficient. This option saves small business owners time, money, and stress in terms of income statement preparation. The single-step format is also suitable for service-based businesses. Why? They don't have to deal with certain details, like calculating the cost of goods sold. In short, a single-step income statement provides small businesses with the basic data that internal stakeholders may need to evaluate general business health.
Multi-step income statements may be needed for larger companies or those with more complex operating structures. The multi-step format is the gold standard for publicly traded companies, which need to provide more granular data to external stakeholders.
That said, small businesses that want more detailed insights into their financial performance can still opt for a multi-step format. This may be needed if you are looking to expand your small business and seeking investments, for example. Potential creditors and investors will want the more detailed financial information about your operations that a multi-step statement provides.
Let Skynova Help You With Your Small Business Financial Statements
Making income statements is simple with Skynova's software products. Skynova is dedicated to demystifying small business accounting, allowing for more streamlined bookkeeping. By saving you time on these administrative tasks, we give you more freedom to focus on your business's success.
Notice to the Reader
The content regarding income statements within this article is meant to be used as a general guideline and may not apply to your specific situation. Always consult with a professional accountant for specific advice regarding different bookkeeping practices.