The income statement is an accounting report that expresses a company’s performance over a specific period (yearly, quarterly, monthly or other), by reflecting the revenues and the costs that the company incurred during its operating and non-operating activities. All this information is aggregated into large categories of gains and costs: the accounts. As a result, the income statement delivers the net income, which is simply the company’s gains minus its costs.
There are two alternative presentations of the income statement:
- Income statement by nature: gains and costs are aggregated into accounts that have similar nature or type.
- Income statement by function: the cost accounts are classified and organized by the role which a type of cost has within the company.
Income statement by nature
An income statement classified by nature expresses the accounts by their type, such as depreciations, employees’ benefits expenses, utilities and so on. There is no hint about the allocation of the expenses according to theirs functions within the business.
CASFLO’s Income Statement by nature
Lets look deeper into the accounts of the income statement by nature produced by the CASFLO APP. The following table has the list of accounts. You can notice that on the middle column there is the signal of each account: gains are represented with plus and expenses with a minus. Net income and the intermediate calculations are represented with an equal symbol. The rightmost column provides an example
|Raw material and consumables||–||830.000,00|
Income statement by function
In an income statement by functions, the expenses are combined by their roles in the operational process: cost of goods sold (COGS), general and administration expenses, sales and marketing expenses, research and development (R&D) costs and other functions that may be deemed as relevant to understand the evolution of the company. The income statement by functions allows the calculation of the gross profit and the operating profit.
That means that the employees’ benefits on an income statement by nature are broken down and allocated into the costs functions on the income statement by function. How they will be split depends on whether the employee works in production, sales and marketing, R&D, general and administration or another type of function.
Although in CASFLO APP it does not occur, in some presentations, depreciations may also be allocated to each function: into COGS if it is a machine, into sales and marketing if it is a salesperson’s car, under R&D costs if it is laboratory equipment and under general and administration expenses if it is office equipment used by the administrative department.
Important: the final result, the net income, must be equal on both by nature and function Income Statements.
Most large and medium sized businesses use the function presentation in their reporting, although for tax and official purposes the income statement by nature is also required. It is also common to see differences between countries: the income statement by nature is more used in European countries, whereas in the United States most companies use the income statement by function.
CASFLO’s Income Statement by function
CASFLO APP is conceived to be able to easily convert the income statement by nature into an income statement by functions. The section dedicated to the income statement of user manual explains how.
It is common to see that the depreciations are also allocated to the cost areas, we have opted to keep it isolated in CASFLO APP. This hybrid organization of the income statement is becoming more frequent.
|General & Administration||–||46.040,00|
|Sales & Marketing||–||52.436,00|
|Research & Development||–||55.191,80|
|Other gains and costs||+/-||500,00|
Notice how the Net Income is equal between both income statements.
The diagram presents how each item on CASFLO’s income statement by nature connects to the income statement by functions: