Income Statement by Functions

This is the method of income statement in which expenses are grouped according to their functions or classes such as cost of goods sold, administrative expenses, selling expenses. The beauty of this method is that it allows the calculation of gross profit and operating profits. That is why, it is used in multi step income statement.

This method is used in almost all medium and large size entities.


CPT is a well known brand in North American region for selling high quality digital cameras. Within a short span of time, it has attracted a large customer base and is given a very tough time to the world’s most popular brand in North American countries. CPT imports all its components and parts from various suppliers and then assembles it to make the complete digital camera. The financial analysts think that the reason behind the rapid growth of the CPT is not other than the heavy marketing. CPT has incurred a heavy amount over the promotion of each of its digital camera using top class celebrities in the film industry. Following is the trial balance of CPT for the year ended 30th June, 2017:


Trial Balance

For the Period Ended 30th June, 2017

Sales revenue 700,000
Creditors 39,000
Freehold premises144,000 
Property, Plant & Equipment210,000 
Printing & Stationary2,400 
Bad debts3,000 
Cash at bank18,000 
Cash in hand1500 
Insurance expense3,000 
Capital 153,000
Opening stock60,100 


Closing stock is $100,000.

Depreciation is to be charged at 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} on Property, plant & equipment.


Prepare multi-step income statement for CPT for the year ended 30th June, 2016.



Income Statement

For the Year Ended 30th June, 2016

Sales revenue 700,000
Cost of goods sold  
Opening stock60,100 
Add: Purchases240,000 
Less: Closing stock(100,000) 
Gross profit 200,100
Operating expenses  
Depreciation expense ( 210,000 x 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} )21,000 
Payroll expense30,000 
Printing & stationary2,400 
Bad debts3,000 
Insurance expense3,000 
Net profit 140,700

As you can see, we have prepared income statement by function process. First we calculate gross profit and then subtracted operating expenses from the gross profit figure to arrive at net profit figure. Income statement by function is a critical report for the management and Board of directors in making right decisions as compared to the income statement by nature where everything is grouped together to calculate the net profit figure.