A company's income statement is an important tool for monitoring profitability and performance over time. When building an income statement, everything that affects the revenues and expenses should be included. Along with the standard business transactions, sometimes there are unique transactions that do not qualify as traditional business activities. These should be reported as unusual or extraordinary expenses on the income statement.
The unusual items section of the income statement should include any materially relevant transactions that are not part of the standard business operations. For example, the sale of a business segment, the costs associated with a discontinued line of manufacturing, natural disasters or a change in accounting principles would all qualify as unusual expenses.
Extraordinary or unusual expenses appear at the bottom of an income statement, just above the net income line. For an unusual or extraordinary expense to appear on the income statement, it must be infrequent or a single occurrence, and it must also be unusual. For example, you would not consider the loss on an inventory adjustment or the loss recognized on the retirement of fixed assets to be unusual. This is typical in business. The losses associated with flood damage or the dissolution of a line of business, on the other hand, would not be a typical transaction.
Unusual or extraordinary expenses are typically recorded because they have a material effect on the financial results for the period. Depending on the amounts of the transaction, it may result in a net loss. In some cases, these transactions can affect the company's cash flow, and may have a negative effect on the owner's equity.
When reviewing financial statements containing extraordinary or unusual items, it is important to evaluate the source of the transaction. When these amounts are added to a financial statement, the notes section at the bottom of the page is a valuable resource for an explanation of the expense. Consider the type of transaction when evaluating the performance of the company for the given period.
