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
| Account | Debit | Credit |
| Sales revenue | 900,000 | |
| Purchases | 350,000 | |
| Debtors | 272,000 | |
| Creditors | 40,000 | |
| Freehold premises | 142,000 | |
| Property, Plant & Equipment | 210,000 | |
| Payroll | 30,000 | |
| Printing & Stationery | 3000 | |
| Bad debts | 3,000 | |
| Cash at bank | 25,000 | |
| Cash in hand | 2000 | |
| Insurance expense | 3,000 | |
| Capital | 160,000 | |
| Opening stock | 60,000 | |
| Total | 1,100,000 | 1,100,000 |
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 stock | 60,000 | |
| Add: Purchases | 350,000 | |
| Less: Closing stock | (100,000) | |
| Gross profit | 310,000 | |
| Operating expenses | ||
| Depreciation expense ( 310,000 x 10 % ) | 31,000 | |
| Payroll expense | 30,000 | |
| Printing & stationary | 3000 | |
| Bad debts | 3,000 | |
| Insurance expense | 3,000 | |
| (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 revenue | 28,000 |
| Cost of sales | (7,000) |
| Expenses | (3,000) |
| Net profit | 18,000 |
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.