If you pore over a multiple-step statement of profit and loss, you see selling, general and administrative expenses right underneath the gross profit, which equals total sales less material expense. Accountants often use the terms "statement of profit and loss," "statement of income," "P&L" and "report on income" interchangeably.
Multiple-Step Income Statement
A multiple-step income statement gives prominence to clear, compartmentalized data. In other words, the report tells readers how a company fared in specific sections during the period under review. The first section is the top line, which includes total sales, cost of good sold and gross profit. "Merchandise expense," "cost of goods sold" and "cost of sales" mean the same thing. The second section consists of selling, general and administrative expenses, also known as SG&A costs. Gross profit less SG&A costs yields operating income, also known as income from continuing operations. Accountants then subtract irregular items -- the ones that don't happen often -- from operating income to calculate pre-tax income, which becomes net income (or loss) after deducting taxes.
SG&A expenses include:
- office supplies
- regulatory fines
- consultancy fees
A company invests in SG&A items to operate and respond to the marketplace. For example, if various consumer surveys signal the need for a product or service, the business may spend money to bring to market an item that resembles what the consumer wants.
Cash vs. Non-cash Expenses
A company doesn't spend money on certain SG&A expenses, although these costs reduce the organization's net income and tax payments. Non-cash items include depreciation and amortization. Depreciation is the periodic reduction of a fixed asset's value. In accounting terminology, "fixed asset," "tangible resource," and "capital asset" are identical terms. Examples include equipment and vehicles. Amortization is the depreciation equivalent for intangible assets, such as customer goodwill, patents, brand recognition, trademarks, contract exclusivity rights and copyrights.
Single-Step Income Statement
Unlike a multiple-step income statement, a single-step P&L is more straightforward. Accountants simply lump all revenue items in one section, gathering all expenses in another section. They subtract expenses from revenues to calculate net income (or loss).
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.