Question

explain the difference between classification of expenses by nature and by function.

Answer 1

While classification of expenses by nature require us to record expense based on what categories they are spent on.. example is raw material , depreciation , packaging costs.

While in function method , we have to record the expenses into the activity for which they are incurred. For example cost of goods sold , selling and administration.

In nature method , we can not calculate gross profit while in function method we can.

Also in nature method income statement are normally single step while in function method it's multi step.

In nature method it's just one expense recorded separately while in function method most of the time there are more than one expense grouped. For example we have to record packaging expense separately in nature method. While in function method we can record packaging expense , sales marketing expense , advertising expense, delivery expense all together as selling and distribution expense.

I hope the difference is clear.

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