Extraordinary items are unexpected gains or losses due to unusual circumstances outside a company’s control. They are recorded in accounting records and appear on profit and loss statements. Examples include natural disasters, embezzlement, and sudden changes in demand. Each event is recorded separately, and details are provided in financial statement notes. Most companies only record extraordinary items if they are unlikely to occur again.
An extraordinary item is any type of gain or loss that is not anticipated and due to some type of unusual circumstances that is not likely to be repeated. Typically, events that constitute an extraordinary item involve something that is outside the scope of normal operation and beyond the control of the business. This type of item is included in the company’s accounting records, and typically appears on the profit and loss statement for the period in which 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 were to occur in the state of Florida after the citrus growing season has begun, the snow would likely create significant losses for businesses that grow and sell the citrus. Those losses would be recorded on the business‘ statement of profit and loss and identified as an extraordinary item.
Other types of one-time events may occur that are outside of the control of the company. If a company executive embezzles or steals a portion of the company’s assets, the loss would be recorded and considered an outlier. Similarly, if an unforeseen increase in demand for one of the goods produced by a company arises, then the demand drops sharply after a short period of time, this can be treated as an unusual situation that is not likely to repeat itself, and is classified as an extraordinary item.
In situations where more than one extraordinary item occurs within the same quarterly or annual period, it is likely that each event will be recorded as a separate line item. In general, the line item is descriptive but does not include a great deal of detail. This detail is provided in the notes attached to the financial statement. By accounting for each extraordinary item separately, it is possible to avoid confusing one-time events with regular gains 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 companies will not account for any of these types of unusual events during most years of operation. There is some degree of subjectivity in determining what constitutes an unanticipated event or event, creating a situation where the range of activities that can be considered unusual is extremely wide. Even with the wide range of possibilities, most companies tend to closely evaluate gains and losses, only identifying them as one-off items if there is an extremely high probability that the event will not occur a second time in the foreseeable future.
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