Below the line in accounting can be defined as an income or an expense in accounting that possesses no noticeable effect while dealing with the company profits in the present period. Below the line can be defined as an industry term to stand for expenses that are not accounted for. Though every income and expenditure considered, these incomes should not be included in company financials. Experts recommend when dealing with below-the-line transactions. An expert accountant must be consulted before the judgment on the line cases is passed. The repercussions, when neglected, might poss a severe consequence.
Characteristics of below the line
- Below the line has no impact on the profit and loss account of a company. Below the line, accounting, therefore, will tell the actual financial health of the company with no irrelevant artificial inflating.
- Below the line in accounting will describe items. It does not represent the dividend paid or received by the company.
- It tells other items, such as operating expenses, interest, and tax.
- Below the line, accounting may be employed by publicly held firms. Publicly held firms re-characterize the expenses in the income statement as being below the line. The process aimed at convincing the investors that all the underlying operations of the firm are doing well, then even the total reported profits. This idea is essential in ensuring that the firm earns non-GAAP earnings, which has specific reporting requirements.
- The company considers all other expenses apart from revenues and the cost of goods sold below the line. The operating costs, taxes, and interest will all fall in this category.
Pros and cons
Below the line Accounting Items- Pros
The below the line accounting may lead to a gain in business reputation. When one of the manufacturing or any other asset is underutilized disposed of, the company receives a sizeable non-recurring revenue. It makes the company appears financially stable even when under financial distress. The tax from the asset should be excluded from the income statement since it is not part of the company’s core business. You will eliminate avoiding conveying a misleading picture of the company’s actual financial position.
Below the line Accounting Items-Cons
Below-the-line accounting may pose a severe discrepancy, especially when a skilled accountant is not involved. It also passes a wrong message on its financial statement, mainly when the asset being disposed of is not recognized, yet it still had some small practical applications! The repercussions might affect the state of the financial position of the company. It may have no impact on the profit and loss account but will affect the economic situation.
To conclude, the items that belong to the below-the-line accounting have no impact on the profit and loss account. In the long run, below-the-line accounting might come under scrutiny but at least maintain the strong income position of a company. Below the line transactions, accountant must always involve experts in accounting to take care of future scrutiny.