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Preparing Income Statements

Author: Sophia
PDF Version

what's covered
This lesson will cover how to prepare a multi-step income statement. Specifically, this lesson will cover:

Table of Contents

1. Income Statement: A Review

To review, the income statement is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. A key phrase in that definition is "a given time period," because it is activity-based.

Let's break down the net profit or loss idea. The income statement helps to identify the business's profitability, which is a key component of the purpose of the income statement:

  • The income statement reports on one year or less of a time period.
  • The income statement helps to assess the health or strength of a business, which is important information for shareholders and potential investors, as well as banks.
As you may recall, the income statement formula is revenues minus expenses equals net income, revenues being the inflows from the business operations and expenses being the outflows or the use of assets from the business operations.

There are two types of income statement formats:

  • Single step, because there is only one step: you take the total revenues and subtract the total expenses to get to net income.
formula to know
Income Statement (Single Step)
table attributes columnalign right end attributes row Revenues row cell stack negative space Expenses with bar below end cell row cell Net space Income end cell end table

  • Multi-step, which is a little more complex.
  1. Start with your sales and subtract the cost of goods sold to get your gross profit.
  2. Take that gross profit and subtract all of your operating expenses from the business operations to get to income from operations.
  3. Once you have income from operations, you subtract the other revenues and expenses to ultimately arrive at your net income.
formula to know
Income Statement (Multi-Step)
table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

At the end of the day, the single step and multi-step income statements arrive at the same place, but the multi-step statement has several individual steps that involve calculating gross profit and separating out income from operations, as well as other revenues and expenses.

2. Multi-Step Income Statement: Example

Now we're going to cover a detailed example of a multi-step income statement.

2a. Trial Balance Worksheet

Before we begin, let's take a look at our adjusted trial balance on the trial balance worksheet, which is used to prepare financial statements like the multi-step income statement.

View this spreadsheet in Google Sheets

Since we are working on the income statement, we need to identify the accounts used to prepare it. Do we need all of these accounts for the income statement? The answer is no; we don't need the permanent accounts. All we need are the temporary accounts, the revenues and expenses. As you can see below, we only need the items at the bottom of the adjusted trial balance, starting with sales through the end of expenses.

View this spreadsheet in Google Sheets

hint
Note, there is a difference between the total debits and total credits--they don't equal each other. This difference is our net income, or $33,500.

2b. Multi-Step Income Statement

Using this information and the multi-step income statement formula, let's start building our income statement.

step by step
  1. Starting with sales, we pull the sales out and place them on top. We subtract the cost of goods sold to arrive at our gross profit. Therefore, sales minus cost of goods sold equals gross profit.

    table attributes columnalign right end attributes row Sales row cell stack negative Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell end table

  2. Next, we detail our operating expenses. Using our adjusted trial balance, we have salaries, advertising, insurance, supplies, and depreciation, for a total operating expenses of $134,000. We can then calculate our income from operations, which is gross profit minus total operating expenses.

    table attributes columnalign right end attributes row cell Gross space Profit end cell row cell stack negative Operating space Expenses with bar below end cell row cell Income space from space Operations end cell end table

  3. From there, we look at our other revenue and expense items. In this case, we have interest revenue, as well as interest expense. Therefore, the total "other" revenue is $17,500. Now we can calculate our net income. We take our income from operations of $16,000 and add our total "other" revenue of $17,500 to arrive at our net income of $33,500.

    table attributes columnalign right end attributes row cell Income space from space Operations end cell row cell stack negative Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

Table with header that includes Best Company, LLC, Income Statement, and For the period ending December 31, 2022. The sales section lists Sales of $300,000, Cost of Goods Sold of ($150,000), culminating in a Gross Profit of $150,000. The operating expenses section includes Salaries expense, Advertising expense, Insurance expense, Supplies expense, and and Depreciation expense, totaling $134,000. The Income from Operations section displays $16,000. The other revenue (expenses) section lists Interest revenue and Interest expense, totaling $17,500. Below these sections, the table calculates a Net Income of $33,500.
View this spreadsheet in Google Sheets

As you see in the above multi-step income statement, we also have the header, starting with the company name, "Income Statement," and the important phrase "For the period ending...", which in this case is December 31, 2022. This indicates that this is a period-based and activity-based statement.

Again, remember that you don't need the permanent accounts from your adjusted trial balance; you just need the temporary accounts--the revenues and expenses.

watch

summary
Today we discussed a review of the income statement, which is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. We also explored a comprehensive example of a multi-step income statement.

Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR TERMS OF USE.

Formulas to Know
Income Statement (Multi-Step)

table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

Income Statement (Single Step)

table attributes columnalign right end attributes row Revenues row cell stack negative space Expenses with bar below end cell row cell Net space Income end cell end table

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