What is the primary advantage of the single step format of income statement?

Single Step Income Statement is a method of expressing a profit and loss statement that lists all expenses, including the cost of goods sold, in one column rather than breaking them into subcategories like operating and non-operating expenses; under this method, you line up each expense and calculate the total expenditure.

Table of contents

Format of Single Step Income Statement

Below is the general format to prepare the Single-Step Income statement.

Company Name

Income Statement

For the Year Ended XXX

1. Revenues: Revenues comprise all the income or amount of money received by the business throughout the period under consideration which is usually from the sale of products and services to customers; however, under this type of income statement, it comprises every nature of money or income received, i.e., even from those activities that are not primarily business activities such as the sale of the scarp, interest received on advance paymentAdvance PaymentAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services.read more, etc.
2. Expenses: Expenses or expenditure denotes an outflow of resources or money from the organization to acquire certain goods and services, which were essential to perform the necessary function of providing goods or services to its customers, for example, payment of transportation costs, payment of electricity bills, etc.
3. Net Income: Net income is the result of comparing the figures of total revenue with total expenses, and the resulting figure shall be net income. It shows the organization’s performance throughout the period under consideration and can either be positive, negative, or null, i.e., total revenue is equal to total expenses.

Example of Single-step Income Statement

It is manufacturing and selling different products in the market. Given are the figures from the accounts of G Company. Using the given information, prepare a single-step income statement.

For the financial year 2019, total sales of the company were (net of $7,000 sales discounts and $29,600 sales returns and allowances) $502,700, and interest revenue was $12,500, whereas the total Cost of goods sold was $225,000. During the same period salaries expense was $47,000, Depreciation expense—the building was $37,000, Advertising expense $14,300, Office supplies expense $3,800 also Gain on disposal of store equipment $3,000 and Interest expense was $1,000, Rent paid throughout the year was $1,800, expenses paid for travel and entertainment was $3,100, and other sundry or general expenses were $800.

Solution:

Therefore net income is $184,400, which will give a general idea that the company is making a surplus of money. Still, it will not enable us to analyze further than that. I.e., we cannot determine gross margins or prospects just after the perusal of this statement. It would require much effort if one wants to know that aspect of the company.

Advantages

• It offers a simplified snapshot of an entity’s revenue and expenses. I.e., its simple format enables its reader a basic understanding of its affairs. The reader must not be a financial expert to squeeze some meaning out of it.
• It covers most of the basic information. Thus, it can help formulate a general view of the entity without performing a deep analysis.
• The workload of accountants is reduced as this simplified approach makes record-keeping easier, and analyzing the figures also becomes easy.

Disadvantages

• The single-step income statement gives only a basic view of the entity for the period under consideration. Thus, it may not be useful enough for a person like an investor to make an appropriate decision.
•  It lacks information about gross margin and operating margin data. Hence makes it difficult to identify the source of most expenses, which will make it further difficult to make any future projections.
• It does not differentiate between primary activities, i.e., its core activities and non-core activities. It treats them the same way, which may lead to misunderstanding.

Important Points

• The single-step format is not the most commonly used as it lacks many features of information, which are essential to conclude. For example, it lacks subsets of information within the statement, such as gross margin or expenses breakdowns and their specific nature.
• In this income statement, individual expense accounts are combined into broad categories: selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more, general and administrative expenses, and the cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more.

Conclusion

The single-step income statement is best suitable for organizations and individuals who are not very humongous in size. Also, if they require the presentation of information in a simple manner. However, managers use this method of reporting for internal use in single departments and company divisions to analyze a company’s performance and set the budget for future periods. Also, some companies (even some huge ones) present it as part of their annual accounts with other statements in detail. Hence, the person who wants the data to be presented in this form can also have it.

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This article has been a guide to Single Step Income Statement. Here we discuss the format to prepare the single-step income statement along with examples & explanations. You can learn more from the following articles –

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