A single-step income statement is an income statement laid out so the period’s net income is reached in one subtraction. All revenues and gains are grouped into one total, all expenses and losses into another, and the second is taken from the first. Nothing interrupts that subtraction, so neither gross profit nor operating income appears as a subtotal anywhere on the face of it. A multi-step statement stops at both on the way down and lands on the same bottom line, and its fixed order is in multi-step income statement.
What the Format Looks Like
A simple income statement combines all revenues into one category, followed by all expenses, to produce net income. There are very few individual accounts, and the statement does not consider cost of sales separate from operating expenses. Simple and single-step are two names for one format (OpenStax, Principles of Accounting, Volume 1: Financial Accounting, 6.6).
Say a bookkeeping practice closes a year on the amounts below.
Fees earned 412,000
Interest income 1,800
Gain on sale of equipment 3,200
Total revenues and gains 417,000
Salaries and benefits 248,000
Rent and occupancy 41,000
Software and subscriptions 19,000
Insurance 7,500
Depreciation 11,300
Total expenses and losses 326,800
Net income 90,200The gain sits inside the revenue group because the format has no separate section to give it. That grouping follows the period elements the statement reports, revenues, expenses, gains and losses, which are defined in the income statement.
When the Format Fits
Collapsing the subtotals costs the reader nothing whenever those subtotals would carry no information, and a service client with no cost of sales is in exactly that position at the gross profit step, as multi-step income statement sets out.
The AICPA publishes a special purpose reporting framework for small- and medium-sized entities that do not need GAAP financial statements. Its statement of operations should distinguish income or loss before discontinued operations, the results of discontinued operations, and net income or loss for the period, and when arriving at the first of those it should present major elements, such as revenue, cost of goods sold, operating expenses, other revenues and gains, and other expenses and losses (AICPA, Financial Reporting Framework for Small- and Medium-Sized Entities, November 2017, paragraph 7.03). That list names neither gross profit nor operating income. It binds only an entity that has chosen it, but it does show that neither multi-step subtotal is a required line under that framework. A client that files nothing with the Securities and Exchange Commission sits outside the prescribed captions as well, and those captions are set out in the income statement.
Single-Step Versus the Contribution Margin Format
Two short statements can look alike and still be built on different sorting rules. A contribution margin income statement also skips gross profit, but it is arranged by how costs behave rather than by collapsing the functional subtotals, taking variable costs out of sales to leave contribution margin and then fixed costs out of that. Single-step drops the functional stopping points; the contribution format replaces them with behavioral ones. Its layout is in contribution margin income statement.
Common Questions
One block of revenues and gains, one block of expenses and losses, and net income beneath them. The format carries few individual accounts, and which ones a statement names follows the ledger behind it, so two single-step statements can look different and still be the same format.
The number of income subtotals between the top line and the bottom one. A single-step statement carries neither gross profit nor operating income, a multi-step statement (also written multiple-step) carries both, and the two formats reach the same net income. What each subtotal means and the full chain of subtractions behind that figure are in net income.
It is faster to prepare and easier to hand to someone who only wants the result. The simple income statement might be more appropriate for external use, as a summary for investors and lenders, while the multi-step income statement may be more beneficial for internal use and management decision-making because of the detail in account information (OpenStax, Principles of Accounting, Volume 1: Financial Accounting, 6.6). That advantage ends the moment a reader needs to compare operating performance year over year, because the format prints no operating income line to set against last year’s.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a real block of its own statement preparation through a trial task before any client file depends on it.
