Income Statement (By Nature Vs By

Function)
Is an income statement presented by nature of expense or by function of
expense?
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 is the one in which expenses are disclosed
according to 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 20XX

Sales 573,610

Expenses:

Purchases, delivery charges and other (158,401)

direct costs

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 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 20XX

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 541

tax

Profit before tax 10,929

Tax expense (3,371)

Profit from continuing operations 7,558