Income statement by nature vs income statement by functions

accounting , income ,statement

The income statement by nature method has no reallocation of these expenses to different functions of the entity. It is employed by small businesses and used in a single-step income statement due to its simplicity. On the other hand, the income statement by function has their expenses disclosed according to features and allow calculation of gross profit within the income statement.

For example (Income statement by function)

Keroche a reputable household name in manufacturing spirits and wines in East Africa. Overtime has attracted a large customer base and given other distiller companies a fierce competition. The success of the company is not only due to its substantial investment in promotion but its assurance of quality products. Financial analysts think that its possible marketing could be the reason for driving sales for the company products. Following is the trial balance of Keroche for the year ended 30th June 2019; they sought to calculate a multi-step income statement.

Keroche

Trial Balance

For the year ended 30th June 2019

AccountDebitCredit
Sales revenue 900,000
Purchases350,000 
Debtors272,000 
Creditors 40,000
Freehold premises142,000 
Property, Plant & Equipment210,000 
Payroll30,000 
Printing & Stationery3000 
Bad debts3,000 
Cash at bank25,000 
Cash in hand2000 
Insurance expense3,000 
Capital 160,000
Opening stock60,000 
Total1,100,0001,100,000

Adjustments:

Closing stock is $100,000.

Depreciation is to be charged at 10% on Property, plant & equipment

In a case example like this to be able to calculate income statement by function, we are first supposed to calculate gross profit, and then subtract operating expenses from total profit figure to get the net profit.

Solution

Keroche

Income Statement

For the year ended 30th June 2019

 $$
Sales revenue 900,000
   
Cost of goods sold  
Opening stock60,000 
Add: Purchases350,000 
Less: Closing stock(100,000) 
Gross profit 310,000
   
Operating expenses  
Depreciation expense ( 310,000 x 10 % )31,000 
Payroll expense30,000 
Printing & stationary3000 
Bad debts3,000 
Insurance expense3,000 
  (70,000)
Net profit 240,000

The income statement by nature, on the other hand, groups everything together to calculate the net profit figure, and no attention is paid on the function of different departments, mostly preferred method for small companies because of its simplicity.

 Example

Still using Keroche as our company of choice, as aa reputable manufacturing company, has the following data available for its recent financial year ended on 30th June 2019.

Sales revenue = $ 30,000, Purchases = $ 5,500, Opening stock = $ 3,500, Closing stock = $ 2,000,Depreciation expenses = $ 1,000, Rent expenses = $ 1,000, Insurance expenses = $ 300,Electricity expenses = $ 200,Parking expenses = $ 200,Repair & Maintenance expenses = $300 and Sales return = $ 2,000

Solution

Net sales = sales revenue – sales return = 30,000 – 2,000 = 28,000

Cost of goods sold is usually summation   of  Opening stock with purchases  and deduction of   closing stock = 3,500 + 5,500 – 2,000 = 7,000

Expenses = depreciation expenses + rent expenses + insurance expenses + electricity expenses + parking expenses + repair & maintenance expenses = 1,000 + 1,000 + 300 + 200 + 200 + 300 = $ 3,000

Keroche

Income Statement by Nature

For the Year Ended 30th June, 2019

 $
Sales revenue28,000
  
Cost of sales(7,000)
Expenses(3,000)
Net profit18,000

Accounting homework on calculating gross profit by multi-step for income statement by function or grouping as in income statement by nature should not be hard ,and if you ever think I need to do my accounting homework, reach us, Accounting is always our specialty.