Income Statement by Nature of Expense

The 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 their nature such as depreciation, transports costs, rent expense, wages and salaries etc. There is no reallocation of these expenses to different functions of the entity (i.e. cost of goods sold, selling costs, administrative costs and other expenses).

This method of disclosure of expenses is used in single step income statement and it is usually employed by small businesses due to its simplicity. However there is drawback in this method 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.

Company A
Income Statement
For the Year Ended June 31, 2011
 
Sales$305,610
Expenses: 
Beginning Inventory$16,800 
Purchases184,100 
Ending Inventory−21,050 
Depreciation Expense14,790 
Rent Expense21,000 
Salaries and Wages Expense38,320 
Supplies Expense3,510 
Utilities Expense6,900 
Interest Expense375 
Total Expenses−264,745
Net Income$40,865

Written by Irfanullah Jan