Income Statement by Function of Expense

An income statement by function is the one in which expenses are disclosed according to their functions such are cost of goods sold, selling expenses, administrative expenses, other expenses/losses etc. This method allows us to calculate gross profit and operating profit within the income statement and therefore it is usually used in the multi-step format of income statement. Most large and medium sized businesses use the function method of expense disclosure.

The use of function method to disclose expenses still requires us to disclose the individual expenses by nature method under each function either on the face of the income statement or in the notes to the income statement.

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

Company A
Income Statement
For the Year Ended June 31, 2011
Cost of Goods Sold−445,940
Gross Profit$343,220
Operating Expenses: 
Selling Expenses$109,310 
Administrative Expenses127,270 
Total Operating Expenses−236,580
Operating Income$106,640
Other Incomes/Expenses: 
Gain on Sale of Equipment$3,570 
Interest Expense−1,150 
Net Other Incomes/Expenses:2,420
Net Income$104,220

Written by Irfanullah Jan