Usually, an Income Statement can calculate and present the net income of a business entity in two basic formats; i.e. Single-Step Income Statement and Multi-Step Income Statement.

1.         Single-Step Income Statement

In a single-step income statement, the net profits or net income is calculated by directly reducing all the expenses from the total revenue of the business during the reporting period. The expenses are not segregated and grouped as direct or indirect costs.

The format of a simple single-step income statement is:

1.2.         Multi- Step Income Statement

In a multi-step income statement, the profits are segregated into gross profit, operating profit, and net income. This type of presentation format is usually more informative from the user’s point of view as they can easily identify the income pertaining to the normal operations, the non-operating incomes, and the extraordinary income. The major resulting figures that can be obtained from a multi-step income statement are:

a.  Gross profit. It is the amount obtained by reducing the direct cost of production from the net revenues.

b.  Operating profit. When the net operating expenses are reduced from the gross profit, we get the operating profit figure.

c.  Income before tax. When the financing cost of debt (usually long-term) is reduced from the operating profit, we get the income/earnings before tax.

d.  Net Income. The net income/losses from the discontinued operations (net of tax) are reduced from the income before tax, we get the net income. This is the amount of economic benefit earned by the business entity from the whole of its operations.

The general format for a multi-step income statement is as follows: