Sales at your ecommerce business are taking off. Despite the growth, it’s still a simple business with you handling the orders and managing the day-to-day. That means keeping track of sales revenues and expenses doesn’t require a complex financial statement. All you need is a single-step income statement.
Here’s how single-step income statements work, along with their advantages and drawbacks.
What is a single-step income statement?
A single-step income statement is a summary of a business’s profitability that uses one calculation to arrive at net income before taxes—hence the single step. It groups all revenue together regardless of the source and does the same for expenses. It then subtracts expenses from revenue to determine net income.
Small business owners with simple operations, such as sole proprietorships and partnerships, may prefer the single-step income statement. As they grow in size and complexity, businesses graduate to the multi-step income statement, which sorts revenue and expenses into categories and shows how a business determines net income before taxes.
Advantages of single-step income statements
Single-step income statements may offer some advantages to a small business, including:
Easy to prepare
A single-step format is a quick rundown of a business’s activity, almost a back-of-the-envelope calculation. Income and expenses aren’t sorted by whether they’re an operating expense or non-operating expense, and operating expenses aren’t sorted by production costs or overhead.
Easy to read
The statement doesn’t include a lot of detail. It cuts right to the chase by showing the business’s net income without any intermediate steps, such as gross profit or operating profit. Reading a single-step statement requires little financial background, just an ability to look down a short list of numbers for net income.
Easy to maintain
Bookkeeping for the one-step approach is simple, reducing the work an external accountant does to prepare the income statement. Some small business owners prepare their own income statements, skipping the time and cost of accountants and bookkeepers.
Disadvantages of single-step income statements
Single-step statements have some drawbacks, including:
A single-step statement doesn’t provide details about how a company earned a profit and offers little insight into a business’s financial health. Knowing more about production costs or overhead could help to identify possible cost reductions to boost profit.
Once a business becomes bigger or more complex, a single-step statement isn’t adequate, and it must shift to a multi-step income statement. Prospective lenders and investors require this kind of statement as it conforms to generally accepted accounting principles (GAAP).
Components of a single-step income statement
A single-step income statement has a few components:
This lumps together revenue from business operations, income from sources such as dividends or interest received, and gains from the sale of assets. The income component is a summary list, but it usually doesn’t contain detailed information about other income or gains.
This combines expenses of operating the business, such as production and administration, and non-operating expenses, such as interest paid on debt. Expenses also are listed in summary form, with few details.
3. Net income
The single-step statement subtracts total expenses from total income to calculate net income.
This is the formula for calculating net income in the single-step process:
Net Income = (Revenue + Gains) – (Expenses + Losses)
Example of a single-step income statement
Let’s use a hypothetical company, Clothing Rack Co., an online seller of casual apparel, to show how a single-step income statement might look:
Clothing Rack Co.
Quarter Ended 6/30/2023
|Cost of Goods Sold (COGS)||-150,000|
|Selling, general, and admin. expenses|
|Advertising and marketing||-10,000|
|Total SG&A Expenses||–40,000|
|Operating Profit (Income||60,000|
|Dividends, stock investments||10,000|
|Gain from legal settlement||40,000|
|Total non-operating income||50,000|
|Operating and Non-operating Income||110,000|
|Interest paid on term loan||-5,000|
|Loss on sale of asset||–15,000|
|Total non-operating expenses||-20,000|
|Net Income (Before Tax)||90,000|
The multi-step statement allows the business owner, as well as outsiders such as lenders and investors, to analyze the business’s operating efficiency by showing gross profit, operating profit, and net income.
These profit figures allow quick analysis of a company’s efficiency, expressed as profit margins.
For Clothing Rack, its margins from the multi-step statement are:
Gross Profit Margin = Gross Profit / Total Revenue = $100,000 / $250,000 = 0.4 or 40%
Operating Profit Margin = [Total Revenue – (COGS + SG&A)] / Total Revenue = $250,000 – ($150,000 + $40,000) / $250,000 = 0.24 or 24%
Net Profit Margin = Net Income / Total Revenue = $90,000 / $250,000 = 0.36 or 36%
Single-step vs. multi-step income statements
Single-step and multi-step statements are similar in some ways but have a number of distinct differences:
Both types of statements show the income and expenses of a business, as well as gains and losses. They also calculate net income, reaching the same result, although by different processes.
Single-step statements don’t organize income and expense data by category. Multi-step statements are more detailed and segmented according to types of income and expenses, which show how a business progresses toward net income, or in some cases a net loss.
Single-step income statements can be appropriate for small businesses, such as single-product or single-service businesses, sole proprietors, and partnerships. Large and more complex businesses use multi-step income statements. Manufacturers, for example, use multi-step income statements to clearly separate production and overhead costs.
Multi-step statements offer greater organization and detail, which give users the ability to analyze a business’s financial performance. They also meet the regulatory requirements for corporate financial reporting. Single-step statements are less formal, mainly for internal use by business owners rather than external use by regulators, lenders, and the investing public.
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Single-step income statement FAQ
What are the two types of income statements?
The types of income statements are single-step, which arrives at net income by performing one calculation, and the multi-step format, which reaches net income through multiple calculations.
What kinds of companies use single-step income statements?
Small companies with simple operations may find single-step statements sufficient. The owners of sole proprietors and partnerships are more likely to opt for single-step statements. Businesses with formal corporate structures or those that are publicly traded use the more detailed multi-step statement.
What is not shown on a single-step income statement?
Two key metrics of business performance are shown in a multi-step format but not a single-step income statement: gross profit and operating profit, also known as operating income. A single-step statement doesn’t show the separation of operating and non-operating revenue and expenses.