Definition
The financial accounting term extraordinary items refers to gains or losses appearing on a company's income statement that are both unusual and occur infrequently. These are items that can materially affect the company's financial statements, but are not considered part of the company's normal business operations.
Explanation
To help readers of financial statements to better understand a company's quality of earnings, accountants separate expenses or revenues into several categories of irregular items. Extraordinary items are business events and transactions that exhibit both of the below characteristics:
Occurs Infrequently: given the operating environment of the company, the transaction or event is not likely to occur in the foreseeable future.
Unusual: given the operating environment of the company, the transaction or event is not encountered over the course of normal operating conditions.
These transactions are typically explained in the notes to the company's financial statements and are reported separately, so readers realize they are irregular and understand their impact on the income statement. An often-cited example of an extraordinary item is the loss associated with natural disasters such as hail, fire, and flooding.
Items that would not be considered extraordinary include losses due to labor disputes, write-off of receivables, inventory losses, and gains or losses associated with the exchange of foreign currency. While these transactions or events can materially affect the financial statements of a company, they would likely be considered part of the company's normal business operations and / or could reasonably be expected to occur in the future
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorJanuary 22nd, 2024
The term materiality refers to an accounting constraint that is used to determine the relative importance or value of an item to one of the company's financial statements. If an item is not deemed significant enough to influence the decision-making process of an individual examining the company's financial statements, then that item is not considered material.Moneyzine EditorFebruary 8th, 2024- The financial accounting term unusual gains or losses refers to line items appearing on a company's income statement that are unusual or occur infrequently. These are costs or revenues that would materially affect the company's financial statement, and are considered part of the company's normal business operation.Moneyzine EditorSeptember 21st, 2023
- The term quality of earnings refers to the degree to which earnings reported on the company's income statement are a direct result of sustainable and ongoing business operations. Factors lowering the quality of earnings include inflation and other economic conditions, one-time events, and liberal accounting practices.Moneyzine EditorSeptember 21st, 2023
The accounting industry generates billions of dollars. Accounting industry statistics indicate the size of the accounting industry was $544.06 billion in 2020. It gives us an idea of how many accounting events and transactions occur every day in the world. In this article, we will explain what are accounting events and transactions. The term accounting event refers to a change in an item that should be reflected in the company's financial statements. Accounting events can be internal or external and usually involve a change in assets, liabilities, revenues, expenses or owner's equity.Moneyzine EditorDecember 12th, 2023
