Expenses on the income statement

No doubt your income statement includes many accounts which if all disclosed separately on the income statement in the Annual Report would make the statement longer than usually expected (i.e. 2 pages or even more). Those accounts should in fact be structured into groups – either by nature of them or the function. 

Distributing expenses by nature is in fact really easy and it’s usually the preferred option chosen to present expenses. It comes down to the question of what was the essence of the expense – was it material purchase for production, depreciation, administrative expense or salary paid? All of those represent a separate group on the statement and expenses should be spread answering the question of into which category they fall into. Normally the groups present are as follows (there may be other groups depending on the nature of the business, but those are the ones most commonly shown):

  • Cost of goods sold
  • Other operating expenses
  • Labor costs
  • Depreciation
  • Non-operating expenses

The other option is to group expenses based on the function they serve. If you think about it, there are just a few types of transactions one would have – cost of sales (expenses made directly for the sales to happen), marketing expenses (made purely for marketing and advertising purposes) and normally also administrative expenses (every other expense made for the business that doesn’t serve the purpose of sales or marketing). Note here that payroll, renting, depreciation charges etc. all go under the group they serve. For an example the salaries of people who are involved in coming up with new ideas on how to sell your goods or services are all to be included within the marketing expenses alongside with any outsourced services acquired. Groups present with this structure are as follows (there may be other groups depending on the nature of the business, but those are the ones most commonly shown):

  • Cost of sales
  • Distribution costs
  • Administrative expenses

Whichever option you go for, some grouping needs to be done, as you cannot simply show all accounts. Unless you only have those accounts in your accounting (i.e. one account called “cost of sales” which includes all expenses done for sales etc.)