Financial Accounting: Expense Methods, Assets, Depreciation, Inventory, Liabilities
Classified in Economy
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Nature of Expense vs. Cost of Sales Method
There are two primary methods for presenting expenses in financial statements:
- Nature of Expense Method: This method presents gross output, such as revenue and changes in inventories generated during a period, along with the corresponding expenses. Expenses are categorized according to their nature (e.g., salaries, rent, utilities).
- Advantages: Provides information on the nature of the costs required to run the business.
- Disadvantages: Does not provide information on the costs incurred for specific activities like production or research and development.
- Cost of Sales Method: This method presents the revenue generated in a period and the corresponding expenses for production, as well as expenses for other