My exploration through the world of management accounting led me towards learning more about these 2 formats of the P&L statement.

Speaking with a few consulting Management Accountants, it became clear that the 'default' chart of accounts used in most companies doesn't always capture the story behind the figures for a particular business.

However, a slightly modified Chart of Accounts usually does, so the question for me was more like how to edit the Chart of Accounts easily and compute the P&L.

ProudNumbers contain Chart of Accounts Editor, and I remember very well that coffee shop meeting in Torrington, where the idea was born and later implemented into our product around 2017.

Recently I discovered that most of the US-based airline companies are using P&L (Income statement) based by nature, and that is our subject in this article.

Both formats yield the same result in terms of Net profit before taxation. However, the P&L by nature shows the changes in inventories of finished goods, and in work in progress. This is expressed as a difference between Closed and Opening Inventory values.

The P&L by Nature can be described as

Saying that, we immediately see that the changes in inventories are giving us an idea about finances required to produce the stock.
The by-nature format is simple to apply, as no allocation of expenses is required. This format offers a more detailed breakdown of the costs.

The P&L by function is that classic annotation, as we all know it and use it

In terms of depreciation, it is allocated to respective categories. It also shows the Gross-Profit figure, which allows easier benchmarking within industry.
As the depreciation is not shown directly, the understanding of elements needs to be built from the Cash flow statement.

I went through the exercise in the [1]. The example was familiar, as once we worked on software to administer production of beer barrels.

The factory sold 800 barrels out of 900 it produced. Each barrel sells for £100. The material for each barrel costs £50, and the cost of labour is £20. The sales force costs £4,500 per year, and the outsourced admin £4,000.
The depreciation for the year is £3,000.

The cost of material was £46,000, and the opening inventory was counted £4,000, and the closing inventory was £5,000.

I have produced both variants enclosed and checked against the literature.

P_and_L.png

Would you consider this form of P&L presentation useful for your SME?