In this section, i have explained about expense and income in the context of their presentation in Profit and Loss a/c
Note: presentation of income and expense into categories- Operational and non-operational items on the face of P&L are mandatory as they form the basis of the company's performance reporting.
What is income?
Income refers to the inflow of economic benefits earned by an entity through its primary business activities or other sources. It can be categorized as operating income or non-operating income, depending on its origin.
- Operating Income: Money earned from primary revenue generating activities of the entity.
Example:
a) For a manufacturing unit : from sale of goods.
b) For a service based entity: it is fee from provision of services. c) Other operating revenue like export incentives, duty drawbacks, or income from job work. - Non-Operating income: Non-operating income are money earned from secondary activities and not from entity’s primary/core business. Non-operating income may be regular, foreseeable and recurring. Though it does not reflect the core business performance, it contributes to the overall financial health of the business. Example: Interest income from deposits, rental income from leased property, dividend income from investments
What is expense ?
Expense refers to cost incurred by the entity to generate revenue or maintain the operations. It can be operating expense or non-operating expense.
- Operating expense: Refers to day-to-day costs directly tied to running the core business activities. They are incurred in normal course of business operations.
Example:
a) For a manufacturing unit : it is Cost of Goods sold, factory expense, marketing etc
b) For a service based entity: it is Cost of Services Rendered: staff salary , consulting fees, travel for client work. - Non- Operating expense: These are costs incurred by a business that are not directly related to its primary revenue generating activity or core operations. It can be recurring and predictable in nature.
They are typically expenses arising from activities outside the main business process or as a result of financial decisions taken.
These are not considered for evaluating the operational efficiency or performance.
Example: Interest expense, Discount on issue of shares, Expenses related to investments
Exceptional items:
As per Ind AS-1, even though the exceptional items is not formally defined, these are material income or expense items arising from ordinary business activities, but due to their nature, size, infrequency is significant enough to affect understanding of the entity’s financial performance, then they are called exceptional items.
Extraordinary items:
Under Ind AS, the extraordinary items category is no longer allowed. All significant and unusual items are typically treated as exceptional and disclosed accordingly.
Disclosure in Profit and loss account:
Following are the disclosures in P&L with respect to Operating, Non-operating items and exceptional items.
Operating items presented under:
>> Revenue from Operations
>> Operating Expenses (e.g., cogs, employee benefits, depreciation, other operating costs)
Non-operating items shown under:
>> Other Income (for non-operational income)
>> Finance Costs or Other Expenses (for non-operational expenses) These are typically placed below operating profit to distinguish them from core performance.
Exceptional item:
>> Disclose separately on the face of the P &L statement or in the notes, with a clear explanation of the nature and amount.