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Accounting reports all activity in a business, placing a monetary value onto many different transactions that occur on a frequent basis. Accountants classify transactions in many different ways, with one semicommon transaction being an exceptional item. This item is special or not a normal activity in a business; however, it still needs representation on financial statements. Examples of exceptional items include restructuring costs, profits made from disposals, and unusual profits or losses from different activities. National accounting standards require the inclusion of these items on a company’s income statement or balance sheet.
Companies report normal business activity on the income statement, which reports a company’s revenue, cost of goods sold, and expenses. The result of these items is the net profit made from regular business activities. An exceptional item that goes on the statement may have its own section just below the operating profit line. The special section allows users of the income statement to understand why a company made or lost more money than expected from its business operations. Each exceptional item has its own line in this section of the income statement, with some actions or items affecting the balance sheet as well, depending on the transaction.
It is best to understand all types of general exceptional item categories that may be on a company’s income statement. Restructuring costs occur when a company makes major changes to current operations. For example, switching manufacturing methods in an overall manner generally results in restructuring costs. A closely related item to restructuring costs is the profit or loss on the disposal of an asset. When a company removes a major piece of equipment from its production process, it sells the item for profit or scrap and records the gain or loss on its financials.
Unusual profits and losses occur when a company engages in an activity that does not represent normal business sales. For example, selling off a large portion of inventory the company will no longer sell may be an exceptional item. This is exceptional because it is a one-time sale that may be to a distributor or other company — basically, a nonstandard customer. When a company liquidates itself of inventory, it means the company will not or does not plan to remain in a specific industry. The complete liquidation represents a one-time profit or loss that the company does not expect to engage in a second time.