Natural expense classification

Natural expense classification refers to the reporting of expenses by the nature of each type of expense. An example of natural expense classification is to report expenses in the following manner:

  • Compensation expense
  • Depreciation expense
  • Insurance expense
  • Office supplies expense
  • Travel and entertainment expense
  • Utilities expense

This reporting treatment varies from the alternative of reporting expenses by function, such as:

  • Accounting department expense
  • Engineering department expense
  • Marketing department expense
  • Selling department expense

The natural expense classification is more likely to be used in smaller companies that do not have formal departmental reporting structures.