To report expenses by function means to report them according to the activity for which the expenses were incurred.

For a business, the reporting of expenses by function means the income statement will report expenses according to the following functional classifications: manufacturing, selling, general administrative, and financing.

For a not-for-profit organization, the reporting of expenses by function means the statement of activities will report expenses according to the following functional classifications: 1) each of its major programs, and 2) the supporting services which are a) management and general, b) fund-raising, and c) membership development. It will also present the expenses by nature, such as salaries, electricity, repairs, etc.

(Classifying expenses according to salaries, electricity, repairs, etc. is referred to as natural classifications, or classifying expenses by their nature.)

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