Q1IFRS - Intermediate Accounting (Kieso)

Question

IFRS4-1 Explain the difference between the “nature-of-expense” and “function-of-expense” classifications.

Step-by-Step Solution

Answer

Nature of expense method classifies expenses according to their nature based on the type of economic expenses incurred. 

Function of expense method groups expenses depending upon the purpose for which these costs are incurred.

Step 1: Meaning of Expense

An expense refers to the cost of operations incurred for generating revenues. Employee wages, salaries, factory rent, utilities, and depreciation are some examples of expenses. 

Step 2: Explanation of differentiation between "nature of expense" and "function of expense" classification

The classification of expenses by nature is associated with different categories of what the expense is in itself, such as rent expense, employee benefits expense, amortization expense etc.

On the other hand, functional classification is done on the basis of purpose, such as the type of activity associated. Administrative expenses, selling and distribution expenses, and manufacturing expenses are some types of functional classification.