US textbooks teach two formats for the income statement. The single-step format puts all revenues in one group and all expenses in another, then subtracts once. The multi-step format reaches net income through a series of subtotals: net sales, gross profit, operating income and income before taxes. Both formats give the same net income. What differs is what a reader can see along the way, and exam questions test whether you put each line in the right section.
This post builds both formats from one trial balance. For the general difference between the income statement and the balance sheet, see our income statement vs balance sheet guide. The focus here is on formatting.
The Data: Larkspur Home Goods, Year Ended December 31, 2026
| Account | Amount ($) |
|---|---|
| Sales Revenue | 420,000 |
| Sales Returns and Allowances | 12,000 |
| Sales Discounts | 8,000 |
| Cost of Goods Sold | 244,000 |
| Sales Salaries Expense | 38,000 |
| Advertising Expense | 9,500 |
| Delivery Expense (freight-out) | 4,500 |
| Office Salaries Expense | 31,000 |
| Utilities Expense | 6,200 |
| Depreciation Expense (office) | 7,800 |
| Insurance Expense | 3,000 |
| Interest Revenue | 1,800 |
| Gain on Sale of Equipment | 2,200 |
| Interest Expense | 6,000 |
| Income Tax Expense | 11,340 |
The Multi-Step Income Statement
| Sales revenue | 420,000 | |
| Less: Sales returns and allowances | 12,000 | |
| Less: Sales discounts | 8,000 | (20,000) |
| Net sales | 400,000 | |
| Cost of goods sold | (244,000) | |
| Gross profit | 156,000 | |
| Selling expenses: sales salaries 38,000; advertising 9,500; delivery 4,500 | 52,000 | |
| Administrative expenses: office salaries 31,000; utilities 6,200; depreciation 7,800; insurance 3,000 | 48,000 | |
| Total operating expenses | (100,000) | |
| Income from operations | 56,000 | |
| Other revenues and gains: interest revenue 1,800; gain on sale of equipment 2,200 | 4,000 | |
| Other expenses and losses: interest expense | (6,000) | (2,000) |
| Income before income taxes | 54,000 | |
| Income tax expense | (11,340) | |
| Net income | 42,660 |
Each subtotal answers its own question:
- Net sales: what customers actually kept and paid for, after returns and discounts.
- Gross profit: the markup earned on the goods themselves. Larkspur's gross profit rate is 156,000 ÷ 400,000 = 39%.
- Income from operations: how well the core business ran, before financing costs and one-off gains.
- Income before income taxes: profit from all activities, before the tax charge.
The Single-Step Income Statement
| Revenues | |
| Net sales | 400,000 |
| Interest revenue | 1,800 |
| Gain on sale of equipment | 2,200 |
| Total revenues | 404,000 |
| Expenses | |
| Cost of goods sold | 244,000 |
| Selling expenses | 52,000 |
| Administrative expenses | 48,000 |
| Interest expense | 6,000 |
| Income tax expense | 11,340 |
| Total expenses | 361,340 |
| Net income | 42,660 |
The bottom line matches. Many textbooks show income tax as a separate line after "income before income taxes", even in a single-step statement. Follow whichever layout your course uses; both are accepted.
Which Format When?
Single-step is simpler and makes no claim about which costs are "operating", which is why many smaller companies and service businesses use it. Multi-step is the format for merchandisers, because gross profit only means something when a company sells goods. If a question gives you Cost of Goods Sold, Sales Returns or Sales Discounts, it almost always expects multi-step.
The figures feeding net sales and cost of goods sold come from the merchandising entries in our perpetual vs periodic guide. The COGS figure itself depends on the cost-flow method, as shown in our FIFO, LIFO and weighted average problems.
Below Net Income From Continuing Operations
If a company has sold or closed a major part of its business, that result is reported separately as discontinued operations, net of tax, after income from continuing operations. US GAAP no longer allows "extraordinary items". Unusual or infrequent items now go within income from continuing operations, usually as their own line in "other". The IFRS presentation rules (expenses by nature vs by function) are covered in our IAS 1 guide.
Common income statement format mistakes
- Listing sales returns or discounts as expenses. They are contra-revenues and are deducted from sales to reach net sales, above gross profit.
- Putting interest expense in operating expenses. Interest is a financing cost and belongs in other expenses, below income from operations.
- Treating a gain on the sale of equipment as revenue. Selling equipment is not the company's business, so the gain goes in other revenues and gains.
- Putting freight-out in cost of goods sold. Delivery to customers is a selling expense. Freight-in is part of cost of goods sold.
- Splitting depreciation the wrong way. Depreciation on store fixtures is selling; on office equipment it is administrative. Read the account description.
- Including dividends. Dividends are a distribution of net income and never appear on the income statement.
Practice both formats on Accountely's multi-step income statement and single-step income statement challenges. The grader checks every line's placement and every subtotal, not just the final figure. For the full range of statement drills, see all income statement challenges.
Frequently Asked Questions
What is the difference between a single-step and a multi-step income statement?
A single-step statement totals all revenues and gains, then all expenses and losses, and subtracts once. A multi-step statement shows subtotals along the way: net sales, gross profit, income from operations, and other revenues and expenses. Net income is the same in both.
Where does interest expense go on a multi-step income statement?
Under other expenses and losses, below income from operations. It is a financing cost, not an operating expense.
Is a gain on the sale of equipment revenue?
No. Selling equipment is not the company's main business, so the gain goes under other revenues and gains, below income from operations.
Which format should I use?
Use the one the question asks for. Multi-step is the usual choice for merchandising companies, because gross profit is one of the most watched figures. Single-step is simpler and common for service businesses.