Income Statement by Nature
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 | |
Purchases | 184,100 | |
Ending Inventory | −21,050 | |
Depreciation Expense | 14,790 | |
Rent Expense | 21,000 | |
Salaries and Wages Expense | 38,320 | |
Supplies Expense | 3,510 | |
Utilities Expense | 6,900 | |
Interest Expense | 375 | |
Total Expenses | −264,745 | |
Net Income | $40,865 |
by Irfanullah Jan, ACCA and last modified on