How Other Operating Income Is Classified in the Income Statement

Other operating income represents earnings that arise from activities peripheral to a company’s main business but still fall within its ordinary operations. Unlike sales revenue, which stems directly from the sale of goods or services central to the company’s purpose, other operating income reflects supplementary streams such as rental income, royalties, or gains on the disposal of assets. Its clear presentation in the income statement allows users to distinguish between core profitability and additional sources of income that, while beneficial, may not be recurring or sustainable at the same level.

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What counts as other operating income

Other operating income encompasses a wide variety of sources depending on the nature of the company and industry. For manufacturing firms, this might include rental income from subleasing unused facilities, government incentives for energy efficiency, or proceeds from selling production equipment. In service industries, it may consist of consulting fees earned outside the primary client base or licensing income from intellectual property.

Examples include:

• Rental income: When part of office or warehouse space is leased to another party.

• Gains on disposal: Proceeds from selling machinery or vehicles that are no longer used.

• Government grants: Subsidies related to operations, such as research or environmental initiatives.

• Royalties and licenses: Income from allowing third parties to use patents, trademarks, or technology.

• Miscellaneous fees: Charges for providing non-core services, such as training or support.

By aggregating these diverse items into a single category, companies maintain clarity in reporting while signaling that such income is not part of their central business line.

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Presentation in the income statement

In most cases, other operating income is reported below gross profit but above selling, general, and administrative expenses. This placement ensures that it contributes to operating profit but does not distort the main revenue figure. For example, if a manufacturer generates 1,000,000 in revenue, incurs 600,000 in cost of goods sold, and earns an additional 50,000 from rental income, the income statement will show:

• Revenue: 1,000,000

• Cost of Goods Sold: (600,000)

• Gross Profit: 400,000

• Other Operating Income: 50,000

• Operating Expenses: (250,000)

• Operating Profit: 200,000

This presentation demonstrates the supplemental nature of the income. The company’s ability to generate operating profit has improved, but not because of greater efficiency or higher sales—it stems from additional income streams. Analysts reviewing such results are careful to adjust for this distinction.

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Journal entries for other operating income

Accounting for other operating income follows the accrual principle, ensuring that amounts are recognized when earned rather than when cash is received.

Examples include:

• Rental income earned but not yet collected:

  • Debit: Accounts Receivable 10,000

  • Credit: Other Operating Income 10,000

• Sale of equipment at a gain:

  • Debit: Cash 20,000

  • Credit: Other Operating Income 20,000

• Recognition of a government grant:

  • Debit: Grant Receivable 15,000

  • Credit: Other Operating Income 15,000

These entries illustrate the range of transactions that can generate other operating income and the way they are matched to the reporting period.

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Standards under IFRS and US GAAP

Both IFRS and US GAAP recognize the importance of transparency in classifying and presenting other operating income.

• IFRS (IAS 1, Presentation of Financial Statements): Requires companies to present material items of income separately. Other operating income must be disclosed clearly, often as a line item within operating results, so that users understand the sources of profit.

• US GAAP: While less prescriptive, it emphasizes faithful representation. Items that are not part of ordinary sales revenue but still operating in nature are disclosed separately within operating results. Gains or losses of a more unusual or non-operating nature may be presented below operating income.

The key principle in both frameworks is that classification should not mislead stakeholders about the sustainability or source of earnings.

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Impact on financial performance

The presence of other operating income can significantly influence reported profitability. For companies with narrow margins, even modest supplemental income can change the overall picture of operating performance. For example, a company close to breakeven may appear profitable because of a one-time gain on asset disposal.

From an analytical standpoint, recurring items such as rental income or royalties may be considered sustainable, while irregular items such as government subsidies or asset sales are often excluded when evaluating long-term performance. Ratios such as EBIT margin or operating margin may be distorted by these items if adjustments are not made.

Therefore, while other operating income strengthens reported results, it must be evaluated critically to separate recurring contributions from temporary or non-core sources.

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Disclosures required for other operating income

Transparency is essential for understanding the nature of other operating income. Disclosures typically include:

• A breakdown of material components of other operating income.

• Identification of recurring versus non-recurring items.

• Explanations of significant government grants or unusual gains.

• Clarification of accounting policies applied to specific income streams.

For instance, if a company’s operating profit is driven largely by gains on asset disposals, the notes should provide details so that users can evaluate sustainability. Without such disclosures, investors may misinterpret the quality of earnings.

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Operational considerations

Other operating income reflects management’s ability to generate value beyond the primary business. In some cases, this diversification enhances stability, such as when rental or royalty income provides steady cash flows. However, reliance on non-core income can also mask weaknesses in main operations. Companies should ensure that reporting distinguishes clearly between income sources and that non-recurring items are not overstated as part of ongoing performance.

For stakeholders, evaluating other operating income is essential in judging whether reported profitability reflects operational strength or one-time events. Clear classification and detailed disclosure prevent misinterpretation and support better decision-making.

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