This is the method of preparing income statement according to the nature of expense. Here, we accountant does not pay attention to the function or department. This method is utilized in single step income statements. Small companies often use this method because of the simplicity of their business operations and lack of experienced staff.
Drawback
The major drawback with this method is that an entity cannot calculate gross profit and oprating profit.
Example
XYZ is a large sized company engaged in textile industry. It is treated as top 5 companies in the industry due to its customer base. The main reason of such a large customer base is the quality of services and the value added services it offers to its customers at cheap rates as compared to the competitors. XYZ often obtains bulk orders to American countries. Following data is available for its recent financial year ended on 30th June 2016:
Sales revenue = $ 22,000
Purchases = $ 5,000
Opening stock = $ 3,000
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
Sales return = $ 2,000
Required:
Prepare single-step income statement using the information given above.
Solution
Net sales = sales revenue – sales return = 22,000 – 2,000 = 20,000
Cost of goods sold = Opening stock + purchases – closing stock = 3,000 + 5,000 – 2,000 = 6,000
Expenses = depreciation expenses + rent expenses + insurance expenses + electricity expenses + parking expenses + repair & maintenance expenses = 1,000 + 1,000 + 300 + 200 + 200 + 300 = $ 3,000
XYZ
Income Statement by Nature
For the Year Ended 30th June, 2016
| $ | |
| Sales revenue | 20,000 |
| Cost of sales | (6,000) |
| Expenses | (3,000) |
| Net profit | 11,000 |
As you can see that in income statement by nature method, we are not calculating the gross and net profit which is the main drawback of this procedure. That is why; often accountants avoid using this method. However, for a quick analysis, this method can be used for easy calculation which is done mostly through calculators.
