Extraordinary items in accounting are referred to as any kind of abnormal loss or gain that is not generated from the regular business operations. Such types of events are infrequent in nature and are non-recurring.
The accounting for extraordinary items are done separately in the financial statements of the business entity.
These items are excluded by the financial analysts while determining the profit to earnings ratio for obtaining the real profitability of the business.
Features of Extraordinary Items
Let us look at some of the features of extraordinary items:
1. Materiality: Transactions that fall above the material limit of the organisation are considered as extraordinary items. Materiality is dependent on the industry and the size of the company. For e.g for a bakery, selling a cake for Rs.1 lakh is beyond its usual price and is thus considered as an extraordinary item.
2. Rare or Unusual Nature: The items that are considered as extraordinary do not appear on a regular or frequent basis in the operations of the business.
As of today, the two accounting standards GAAP and IFSC do not entertain the category of extraordinary items in the financial statements. It was not considered an important part of financial statements since January 2015.
This step was taken to reduce the complexity and also the associated costs while making the financial statements.
This concludes our article on the topic of Extraordinary Items, which is an important topic in Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.