What is a Classified Income Statement?

A classified income statement is a financial report showing revenues, expenses and profits, for which there are subtotals of the various revenue and expense classifications. The classified format is used for more complex income statements, to make them easier for users to read. A classified income statement typically contains three blocks, which are noted below.

Gross Margin Section

The gross margin section subtracts the cost of goods sold from revenue, to arrive at the gross margin. This information is useful for ascertaining the amount of profit generated strictly from the sale of goods and services. The line items usually included in this section are:

Operating Expenses Section

The operating expenses section summarizes the cost of all operating expense line items into a subtotal, followed by a profit or loss from operations line item. This information is useful for determining the ability of a business to generate a profit from its core operating activities. The line items usually included in this section are:

Accounting and legal expense
Commissions expense
Compensation and benefits expense
Insurance expense
Rent expense
Supplies expense
Utilities expense

Non-Operating Expenses Section

The non-operating expenses section summarizes all expenses not related to operations. This information adjusts operating income by any additional factors to arrive at net profit or loss for the entire entity. The line items usually included in this section are:

Gain/loss on sale of assets
Interest income and interest expense
Taxes

Related AccountingTools Courses

The Income Statement

The Interpretation of Financial Statements

Example Classified Income Statement

A sample classified income statement appears below.

The Difference Between a Classified Income Statement and Single-Step Income Statement

A classified income statement uses subtotals for various revenue and expense categories, while a single-step income statement simply lists revenue and expense line items in sequence, with no attempt to present sub-totals. There are several differences between these forms of presentation, which are as follows:

Distinction between operating and non-operating sections. A classified income statement breaks out non-operating expenses, while a single-step income statement does not do so.
Gross profit presentation. A classified income statement shows a gross profit line item, while a single-step income statement does not do so.
Level of categorization. A classified income statement categorizes expenses into the cost of goods sold (COGS), operating expenses, and non-operating expenses, while a single-step income statement does not do so.
Suitability. A classified income statement is more useful for larger businesses that need in-depth analysis, while a single-step income statement is simpler and easier to prepare, and so is suitable for small businesses or a quick financial review.