Accounting Business Reporting for Decision Making

230 Accounting: Business Reporting for Decision Making

or the recognition of an accrued expense or accounts payable (liability increase). Expenses are also

associated with administrative functions, and investing and financing activities. Administrative expenses

include items such as rent, office wages and salaries, utility charges and supplies. Finance-related

expenses include interest on borrowings, lease payments and bank charges.

The acquisition of certain assets (such as items of property, plant and equipment) is not an expense

of the reporting period, as there is no reduction in equity associated with the transaction. If the asset

is acquired for cash, cash at bank is reduced but the reduction is offset by an increase in another asset

class — property, plant and equipment. Such items are expected to provide the entity with future

economic resources over a period extending beyond the current reporting period, so it would be inappro-

priate to recognise the acquisition as an expense in the period it occurs. What is periodically recognised

as an expense is the depreciation of such assets. The carrying amount (book value) (which is the dollar

value assigned to the asset in the balance sheet) of the asset must be allocated over the asset’s useful life,

representing future economic benefits of the asset that have been consumed during the reporting period.

Further, when the value of the asset is lower than its carrying amount, the asset is impaired. In such

circumstances, the asset must be written down to its recoverable amount, and the write-down would be

recognised as an impairment expense in the reporting period in which it occurs.

Expense classification

Entities have a choice as to how they display and classify expenses in the statement of profit or loss.

Smaller entities will often list all their expenses in the statement of profit or loss, whereas larger entities

will aggregate their expenses into certain classes for reporting purposes. Entities required to comply with

accounting standards must classify their expenses by nature or function. For example, if an entity clas-

sifies expenses by nature, expense categories in its statement of profit or loss might include employee

benefits expense and depreciation and amortisation expense. If the entity classifies expenses by function,

expense categories in its statement of profit or loss might include distribution, marketing, occupancy and

administrative expenses, and borrowing costs expense.

Look at the 2015 statement of profit or loss for JB Hi-Fi Ltd in figure 6.2. The entity has classified its

expenses by function; namely, cost of sales, sales and marketing expenses, occupancy expenses, administrative

expenses, finance costs and other expenses. Further disclosures regarding the disaggregation of expenses are

minimal. Only certain expenses must be disclosed (e.g. amortisation and depreciation charges, lease rentals,

auditor’s fees and finance costs). Sometimes entities voluntarily provide details of other expenses.

JB Hi-Fi Ltd

Statement of profit or loss for the financial year ended 30 June 2015

Consolidated

Note

2015

$’000

2014

$’000

Revenue

Cost of sales

3 3 652 136

(2 853 883)

3 483 775

(2 727 794)

Gross profit

Other income

Sales and marketing expenses

Occupancy expenses

Administrative expenses

Other expenses

Finance costs

4

798 253

631

(374 084

(160 216

(27 711

(35 414

(5 927

)

)

)

)

)

755 981

520

(355 694

(148 969

(27 600

(32 716

(8 845

)

)

)

)

)

Profit before tax

Income tax expense 5

195 532

(59 021)

182 677

(54 230)

Profit for the year 136 511 128 447