A company manages accounting and bookkeeping services to get insights into financial performance and management. These services help firms organize their financial records per the accounting principles and regulations. They can know how much they owe to others, what percentage is their ownership, annual earnings, accounts payable, debts to collect, and other such information. These details facilitate the preparation of financial statements to report to the internal and external stakeholders about the company's economic progress. The financial statements include a balance sheet that shows assets and liabilities at a particular date, a cash flow statement clarifying the outflows and inflows during the year and final balance, and an income statement, reflecting revenue, expenses, and profit or loss balance.  

While preparing the income statement, businesses can follow one out of the two methods: 

Single-step income statement 

Multi-step income statement 

While the first one gives a snapshot of revenue, expenses, and ultimate gains or losses, the latter follows a three-step process to derive the net income. Let us understand them in detail: 

As the name suggests, the single-step income statement only uses one equation to deliver the profit or loss result. It does not follow a complex pattern and structure. The accounting and bookkeeping services record the revenue and gains and subtract the expenses to get an income or loss balance. The formula used here is as follows: 

Net income/ loss= (Revenues+ Gains) - (Expenses + Losses) 

It is an efficient and straightforward activity that does not require accountants to go the extra mile. The preparation is easy to manage and makes financial statement analysis quick to interpret.  

A multi-step income statement derives its name from the multiple equations used to produce ultimate results. The multi-step income statement breaks expenses and incomes into operational and non-operational. The costs and gains related directly to business operations become operational and vice-versa. The process is similar (revenue- expense= net income); however, the additional steps with varied terms make it a little complex. The different formulas used by accounting and bookkeeping services for multi-step income statement preparation are as follows: 

Gross Profit= Net Sales- Cost of goods sold 

Operating income = Gross profit - Operating expenses 

Net income= Operating income + Non-operating income 

Pros and cons of both methods 

Pros: The single-step income statement reduces the hassle of categorizing expenses and incomes and then deriving results. It follows a straightforward model and thus, is easy to prepare. Moreover, analyzing and interpreting single-step income statement results is more convenient. It provides a snapshot and at-a-glance picture of a firms' performance.  

Cons: Investors or creditors might find the information too thin and inadequate to make decisions. It eliminates various metrics that determine the health and efficiency of the firm.  

Pros: The multi-step income statement provides a detailed and in-depth view of incomes and expenses. The itemized breakdown gives insights into a firms' financial health. It offers an essential metric called "Gross Profit," which lets businesses know how efficiently they use their labor and supplies. Firms can understand how much profit their primary activities generate.  

Cons: If the business lacks the resources to manage a multi-step income statement adequately, it will lead to discrepancies, delays, and less attention to detail. It will make profitability and operating capital harder to calculate.  

Firms can get confused about whether to make single-step or multi-step income statements. The single-step income statement serves the financial decisions for businesses with a simple operating structure, like a sole proprietorship or partnership. However, if the firm wants to raise loans or attract investors, a multi-step income statement is suitable. It provides insights into broken expense and revenue categories that influence decision-making.