Do you always ponder if an income statement is presented by nature of expense or by function of expense? The following is a brief explanation to help us identify between the two ways of presenting an income statement. The choice between the two presentations of income statement is also relevant in preparing XBRL financial statements as we need to select the type of income statement in “filling information” section of XBRL preparation tool.

Income Statement by Nature of Expense

Expenses in an income statement are either classified by their nature or by their function.

An income statement by nature method is the one in which expenses are disclosed according to what categories they are spent on, such as raw materials, transport costs, staffing costs, depreciation, employee benefit etc. The expenses will not be further classified into their functions (i.e cost of goods sold, selling, administrative, etc).

This method of disclosure of expenses is used in single step income statement, usually employed by small businesses as it is simple and relatively easier to be implemented. However, the drawback of this method is that it cannot be used to calculate gross profit within the income statement.

The following example shows the format of an income statement by nature.

ABC PTE LTD
Statement of Comprehensive Income
For the Financial Year Ended 31 December 2017
Sales 573,610
Expenses:
Purchases, delivery charges and other direct costs (158,401)
Changes in inventory 69,426
Depreciation Expense (3,250)
Rent Expense (24,000)
Employee benefit expenses (124,630)
Utilities Expense (6,900)
Interest Expense (375)
Total Expenses (248,130)
Net Income 325,480

 

Income Statement by Function of Expense

An income statement by function is the one in which expenses are disclosed according to the different functions they are spent on (cost of goods sold, selling, administrative, etc.)

This method allows us to calculate gross profit and operating profit within the income statement, and therefore is usually used in the multi-step format of income statement. Most large and medium sized businesses use this method.

The following shows the format of an income statement by function of expense.

ABC PTE LTD
Statement of Comprehensive Income
For the Financial Year Ended 31 December 2017
Revenue 102,716
Cost of sales (55,708)
Gross profit 47,008
Other income 1,021
Selling and distribution expenses (17,984)
Administrative expenses (17142)
Research and development expenses (1,109)
Other expenses (860)
Results from operating activities 10,934
Finance income 1,161
Finance costs (1,707)
Net finance costs (546)
Share of profit of equity-accounted investees, net of tax 541
Profit before tax 10,929
Tax expense (3,371)
Profit from continuing operations 7,558