As you prepare an income statements for your clients, you can choose to report revenue and expenses in a condensed format. You can also choose to give your clients a little more information by reporting their expenses by function. Under a condensed version, you only report total revenue, cost of goods, and total operating expenses. If you prepare a multi-step income statement, you might break the operating expenses into different buckets including selling expenses, administrative expenses, interest expense, income tax expense, and other expenses.
When reporting expenses by function, you give your clients different buckets based on if they’re a for-profit or nonprofit entity. For-profit companies typically use the accounts listed above with the financing activities grouped together. Nonprofit companies report by functions such as program costs, support services, fundraising, administrative, or membership development. Although the accounts are different between your two types of clients, the general purpose is the same, to report expenses in a more transparent and informative way.
The main reason to provide your clients with this information is to help them make better decisions and manage expenses. Under consolidated methods of reporting expenses, expenses are lumped together. Your client doesn’t have the right information to know if it’s spending too much on selling costs or interest expense, or what the general overhead looks like. Reporting expenses by function is also helpful for external users of the financial statements. Your client brings its financial statements to a bank when trying to secure a loan, so the bank uses the information to determine what type of loan to provide. The same is true for financial statement reviews; external accountants reviewing the financial statements appreciate and often require the additional information.
Regardless of whether you report your client’s expenses by function, your client knows its gross profit and gross profit margin. Taking the extra step by breaking out the operating expenses gives it and users of the financial statements greater information. The functional buckets are different between for-profit and nonprofit companies, but the goal of increased transparency is the same for both.