An income statement is a tool that is utilized by organizations and other businesses as a means of accounting for the financial activities of the company within a period under consideration. Two of the features included on the income statement are the types of profits or losses the business has sustained within this period. Just like the name suggests, the extraordinary items on such income statements are those features that may be referred to as unusual activities, which are so rare or unexpected that they will be labeled as extraordinary.
Extraordinary items on income statements are so rare that whenever they occur, they usually boost or decrease the company’s income in a manner that is most atypical for that company. An example of an extraordinary item on an income statement can be seen in a situation where a couple of deer from a nearby park escape and run into a grocery store. While inside the grocery store, the deer cause a lot of destruction that damages the grocery store merchandise. This is so unusual that it will be added to the list of extraordinary items on income statements for that grocery store during its accounts reconciliation. In this case, it will be added on as part of the losses sustained for that business cycle due to the money required to fix the damage.
Sometimes companies simply decide to create a separate account for the extraordinary items on income statements in order to avoid any confusion down the road due to the effects of any unusual dips or spikes in their balance as a result of the extraordinary items. For instance, an antique store may buy some furniture at a flea market to restore and resale, but it turns out that the entire set of furniture are authentic Victorian Era furniture that fetch millions of dollars at an auction. Such a profit would be so unusual for the antique store that it would be listed as part of extraordinary items on income statements. This distinction between normal earnings and extraordinary ones are necessary for tax purposes and as a means of allowing the company itself to give a more accurate account of its financial activities for the business period. Another reason why the demarcation between the two items is necessary is because it allows potential investors or lenders to more accurately conduct an analysis of the state of the company’s financial situation.
