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An extraordinary item is any type of gain or loss that is unanticipated and due to some type of unusual circumstances that are not likely to be repeated. Usually, events that constitute an extraordinary item have to do with something that is outside the scope of the usual operation, and could not be controlled by the business. This type of line item is included in the accounting records of the business, and normally appears on the profit and loss statement for the period where the item occurred.
A common example of an extraordinary item is a loss that occurs due to an act of nature. For example, if a snowstorm would to occur in the state of Florida after the citrus growing season has commenced, the snow would likely create significant losses for the businesses that grow and sell the citrus fruits. Those losses would be noted in the profit and loss statement of the business and be identified as an extraordinary item.
Other types of one-time events that are outside the control of the business may take place. Should an executive of the company embezzle or otherwise steal a portion of the company assets, the loss would be recorded and considered an atypical situation. In like manner, if an unforeseen increase in demand for one of the goods produced by a company should emerge, then the demand falls off considerably after a short period of time, this may be treated as an unusual situation that is not likely to be repeated, and is classified as an extraordinary item.
In situations where more than one extraordinary item occurs within the same quarterly or annual period, each event is likely to recorded as a separate line item. Generally, the line item is descriptive but does not include a great deal of detail. That detail is provided in notes that are attached to the financial statement. By accounting for each extraordinary item separately, it is possible to avoid confusing the one-time events with the regular earnings realized in that period, while also measuring the impact of each unusual event on the overall profitability of the business.
While it is possible to record an extraordinary item at any time, the fact is that most businesses will have none of these types of unusual events to account for during most years of operation. There is some degree of subjectivity in determining what constitutes an unanticipated event or occurrence, which creates a situation where the range of activities that may be considered unusual is extremely broad. Even with the broad range of possibilities, most businesses tend to evaluate gains and losses closely, and only identify them as extraordinary items if there is an extremely high probability that the event will not occur a second time within the foreseeable future.
Extraordinary items are impossible to budget, considering the very nature of such an event is that it is unexpected. However, any responsible organization will carry sufficient insurance to cover things such as disasters or embezzlement, as well as maintain a rainy day funds to cover unpredicted losses.
Financial analysts spend a great deal of time trying to "predict" these unpredictable events in order to properly prepare the organizations they represent. Extraordinary items in accounting show up on the profit & loss statement.
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