In this article we will discuss about operating and non-operating activities of business.
Operating activities are the central means by which the enterprise is expected to obtain income and cash in the future. Results of central, continuing operations, therefore, have a different significance from results associated with other non-recurring activities and events. No definition of the term operations is likely to produce a clear identification of the activities concerned in all types of business.
However, operations normally comprise the provision of goods and services that make up the main business of the enterprise and other activities that have to be undertaken jointly with the provision of goods and services. Such goods and services are produced and distributed at prices that are sufficient to enable a firm to pay for the goods and services it uses and to provide a satisfactory return to its owners.
Operations would include for example, exploration for and development of natural resources, manufacture and distribution of goods and the results of trading and investment activities that are part of the main business of the enterprise.
Gains and losses on marketable securities may be excluded from the results of central operations of a manufacturing concern but may be included in central operations for a dealer in securities.
Operating items are generally of recurring nature and non-operating items are generally considered non-recurring and unpredictable. However, that is not always true. Many items may be operating in nature, but not necessarily recurring. Over time payments during a rush period and acquisition of raw materials under extremely favourable conditions both are operating events, but are possible non-recurring.
Similarly, some non-operating items may be recurring in nature. Under both the income concepts (current operating performance concept, and all inclusive concept), income from normal activities of the enterprise generally is identified separately from unusual items.
The fact that an item, otherwise typical of the normal activities of the enterprise is abnormal in amount or infrequent in occurrence does not qualify the item as unusual (known as extraordinary or special items also).
It remains a part of income from the ordinary (normal) activities although separate disclosure of its nature and amount may be appropriate. An example of such an item would be the write-off of a very large receivable from a regular trade customer.
Although information about comprehensive income and it’s all components are useful for assessments of enterprise performance, net income figure based on recurring (operating) items is generally more useful to economic decision-makers in predicting future income and cash flows.
Recurring non-operating items are just as important as those recurring operating items that are the result of normal business operations. The distinction between operating and non-operating, however, is more useful for measuring managerial efficiency.
The advantage of classifying income items as recurring (operating) or non-recurring is based upon the improved usefulness of the resulting net income figure in the making of predictions by investors. External users and other persons may find it difficult to distinguish between recurring and non-recurring transactions than that of operating and non-operating items.
According to AS-5 entitled ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’ issued by The Institute of Chartered Accountants of India, “There are two approaches to the treatment of non-recurring items. One is to include them in the reported net profit or loss with a separate disclosure of the individual amounts. The other is to show such items in the statement of profit and loss after the determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss. However, the extraordinary items are shown as a part of the current net income.”