Definition
A Single Step Income Statement is a format of income statement in which there is only one subtraction to arrive at net income. It consolidates all revenues and gains into one group and all expenses and losses into another. The final number, or “net income,” is derived by subtracting total expenses and losses from total revenues and gains.
Key Takeaways
- The Single Step Income Statement simplifies the income reporting process by consolidating all revenues and expenses, subtracting expenses from revenues in one step, rather than breaking down revenues and expenses into operational, non-operational, continuing, and discontinued categories.
- This type of income statement is more straightforward as it focuses on the net income derived defeating revenues against expenses. However, it may not provide the detailed breakdown of where revenue comes from or how expenses are classified that investors and management might find useful for decision-making.
- Though the Single Step Income Statement simplifies reporting and is easier for non-finance people to understand, it is not fully in line with the Generally Accepted Accounting Principles (GAAP). Majority of public companies prefer the multi-step format as it provides more details, which are beneficial for investors and internal management.
Importance
The single step income statement is a crucial financial document in business since it simplifies the process by which a company’s profit or loss is calculated over a specified period.
Unlike the multi-step income statement, the single-step format aggregates all revenues and gains at once and all expenses and losses together, subtracting the latter from the former to find the net income.
This convenience and simplicity offer a quicker snapshot and understanding of a company’s profitability, allowing for businesses to analyze their financial health more efficiently.
It’s especially valuable for smaller businesses or those with simple operations as it provides a streamlined, easily-digestible view of their economic standing.
Explanation
The Single Step Income Statement serves a very straight-forward and vital purpose in financial reporting. It provides a simple and clear-cut overview of a company’s profit or loss, without getting into the granular details of each revenue and expense category.
The statement offers an aggregate view of total revenues and total expenses to derive the net income, making it an expedient tool for businesses, especially small-scale enterprises, that may not require a detailed breakdown of their financial performance. Companies and business owners use Single Step Income Statements to get a quick overview of their firm’s overall efficiency and profitability.
It also serves as a useful tool for external stakeholders, such as potential investors or creditors, who are interested in understanding the broad financial health of a company. However, while this statement is beneficial for simplicity and quick decision-making purposes, for comprehensive financial analysis or strategy planning, more detailed multi-step income statements would have their upper hand.
Examples of Single Step Income Statement
A single-step income statement is a simplified financial document that only requires one step to compute the net income, which is subtracting the total expenses from the total revenues. Here are three examples:
**Small Retail Business:** In a small retail business, the company earns revenue from the sale of goods. On a single step income statement, all the revenue earned from these sales would be combined into one total number. Then, all costs and expenses – such as cost of goods sold, operating expenses, salaries, rent, taxes, and interest expenses – are combined into a total expenses number. Net income is simply calculated by subtracting total expenses from total revenues.
**Freelance Contractor:** A freelance contractor, like a graphic designer, could use a single-step income statement to calculate net income. All revenues from projects or clients are totalled, and then all expenses (such as materials, software costs, home office expenses, and taxes) are totalled. The net income is the difference between the two.
**Restaurant Business:** For instance, a restaurant measures its revenues through meal sales and possibly merchandise sales, all of which would be totalled for the single-step income statement. Then, the restaurant must total all of its expenses, such as food cost, labor, rent, utilities, and marketing. The difference between the total revenues and the total expenses will provide the net income.
FAQ: Single Step Income Statement
What is a Single Step Income Statement?
A Single Step Income Statement is a simplified version of an income statement where all revenues are grouped together and all expenses are grouped together. The net income is then calculated by subtracting total expenses from total revenues.
Why is it called Single Step?
It’s called single step because the net income calculation involves only one step, which is subtracting total expenses from total revenues. This contrasts with the multiple steps involved in the multi-step income statement.
What are the benefits of a Single Step Income Statement?
The primary benefit of a Single Step Income Statement is its simplicity. This makes it easier for non-financial stakeholders to understand. Furthermore, it is less susceptible to manipulation and provides a clearer picture of the company’s bottom line.
What are the disadvantages of a Single Step Income Statement?
The Single Step Income Statement, due to its simplicity, lacks detail. It does not provide a breakdown of operating and non-operating expenses or revenues, which could be useful for management, investors, and creditors for making informed decisions.
How is a Single Step Income Statement prepared?
To prepare a Single Step Income Statement, you must first calculate the total revenues by adding together all sources of income. Then, calculate the total expenses by adding together all costs incurred. Finally, calculate the net income by subtracting total expenses from total revenues.
Related Entrepreneurship Terms
- Revenues: The total amount of money generated by the sale of goods or services related to the company’s primary operations.
- Expenses: The costs incurred in the ordinary course of business. These can include cost of goods sold, operating expenses, and taxes among others.
- Net Income: It is the final line of the single step income statement, computed by subtracting total expenses from total revenues.
- Non-operating items: These are the revenues and expenses unrelated to the company’s main line of business, including items like interest paid on loans or gains from the sale of assets.
- Comprehensive Income: This is a component of the income statement that includes all non-owner changes in equity, such as unrealized gains or losses on investments.
Sources for More Information
- Investopedia: A comprehensive source offering definitions of financial and investing terms, guides, video tutorials and more. The site has a page dedicated to explaining the Single Step Income Statement.
- AccountingCoach: A free and reliable source for all things accounting including explanations on different income statement formats like the single step income statement.
- My Accounting Course: Offers an extensive library of accounting lessons, financial calculators, and resources such as explanation of single step income statement.
- Corporate Finance Institute (CFI): An online provider of financial certification programs and resources. Their single step income statement guide provides a simple and detailed explanation of the term.
