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.
|For the Year Ended June 31, 2011|
|Salaries and Wages Expense||38,320|
Written by Irfanullah Jan