What does 'Classification by nature or function' mean?

Answer 1

Classification by nature means that an analysis based on the nature of expenses would, for example, result in classifications for depreciation, purchases, wages and salaries, marketing costs etc. The expenses would be presented in total for each type of expense.

Classification by function means that when an analysis is based on the function of the event (or cost of sales method), this will classify expenses according to their function as part of cost of sales, distribution or administrative activities. While this presentation can provide more relevant information to users, the allocation of costs to function can often be arbitrary. Organisations who chose to do this should disclose additional information on the nature of expenses, including depreciation and staff costs. The enterprise should choose the analysis that provides the fairest presentation of the business activities.