In general terms, operating expenses are the costs of an enterprise that are not directly related to its core activities. The current edition of PBU 10/99 does not contain a precise definition of the terms operating income and expenses due to the change in classification according to Order No. 116n dated September 18, 2006. The legislation now proposes a simplified gradation for other expenses/income, as well as expenses/income for ordinary activities . How to determine what costs belong to what, how to calculate net operating income - we will explain in detail below.
What do operating expenses include?
All indirect expenses of the enterprise are recognized as operating expenses. Previously, there was a classification of costs into non-operating, operating and emergency. With the entry into force of Order 116n, such division was abolished, but it is possible if necessary at the request of the enterprise. A complete list of the main operating expenses is contained in paragraph 11 of Chapter III of PBU 10/99.
Operating expenses include the following costs:
- Representation of assets, including property, enterprises for temporary paid use or ownership.
- Submission for paid use of patent rights to intellectual property for various purposes.
- Participation in the authorized capital of other companies.
- Payment of cash settlements to credit institutions.
- Payment of interest on borrowed obligations of various types.
- Costs of disposal, sale, or other write-off of assets, property, goods, finished products of an enterprise, with the exception of Russian funds.
- Creation of valuation reserves by the enterprise, including for doubtful debts, for depreciation of securities, etc.
The listed types of costs are included in operating expenses if they do not relate to the main activities of the enterprise. Otherwise, such costs are subject to inclusion in ordinary expenses.
What does operating income include?
Similar to expenses, operating income is classified as such if it is not related to the main work of the enterprise. Otherwise, they must be reflected in account 90 and accounted for as revenue from ordinary activities. A complete list of types of income from other operations is contained in paragraph 7 of PBU 9/99.
Operating income consists of income:
- From paid representation to time-limited use of enterprise assets.
- From paid representation of patent rights to various types of intellectual property.
- In connection with participation in the authorized capitals of other companies, including interest and income from investments in bonds and securities.
- From participation in simple partnership agreements.
- From the sale of property, assets of the organization, goods or manufactured products.
- Interest received on loans and borrowings.
- Accrued penalties for violation of contractual terms.
- From assets received free of charge.
- Profit of previous periods.
- Compensation for losses caused to the enterprise.
- Amounts of accrued exchange rate differences.
- Amounts of accounts payable that have already expired.
- Amounts of recognized income from revaluation of assets.
- Other types.
Accounting for operating and non-operating income and expenses.
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Other income and expenses are not directly related to the ordinary activities of the organization and include operating, non-operating and extraordinary income and expenses.
The list of other income and expenses is given in PBU 9/99 and PBU 10/99. Accounting for operating and non-operating income and expenses is maintained on account 91 “Other income and expenses” broken down by subaccounts. Subaccount 91-1 “Other income” reflects operating and non-operating income recognized in the reporting period, and subaccount 91-2 “Other expenses” - recognized operating and non-operating expenses.
Other income and expenses are recognized in accounting, as a rule, in the same manner as income and expenses for ordinary activities. At the same time, for certain types of non-operating income, PBU 9/99 provides special conditions for their recognition:
• fines, penalties, penalties for violation of contract terms, as well as compensation for losses caused to the organization are recognized in the reporting period in which the court made a decision to collect them or they were recognized as a debtor;
• the amount of accounts payable and depository debt for which the statute of limitations has expired - in the reporting period in which the statute of limitations expired;
• the amount of revaluation of assets - in the reporting period to which the date as of which the revaluation was carried out relates;
• other receipts - as they are formed (identified). Depending on the type, operating income in accounting is reflected in the following entries:
• receipts associated with the provision for a fee for temporary use (temporary possession and use) of the organization’s assets, rights arising from patents for inventions, industrial designs and other types of intellectual property, if the listed activities do not form the subject of the organization’s activities: Debit 62 “Calculations” with buyers and customers" Credit 91-1 "Other income";
• income related to participation in the authorized capitals of other organizations (including interest and other income on securities), if participation in other organizations is not the subject of activity, as well as profit received by the organization as a result of joint activities (under a simple partnership agreement):
Debit 76 “Settlements with various debtors and creditors”
Credit 91-1 “Other income”;
• proceeds from the sale of fixed assets and other assets other than cash (except foreign currency), products, goods: Debit 62 “Settlements with buyers and customers” Credit 91-1 “Other income”;
• interest received for providing the organization's funds for use:
Debit 76 “Settlements with various debtors and creditors”
Credit 91-1 “Other income”;
• interest on the bank’s use of funds held in the organization’s account with this bank:
Debit 51 “Current accounts”
Credit 91-1 “Other income”.
Operating expenses, depending on their type, are reflected in the following entries:
• expenses associated with the provision for a fee for temporary use (temporary possession and use) of the organization's assets, as well as rights arising from patents for inventions, industrial designs and other types of intellectual property. These expenses are included in operating expenses if income from these operations is included in operating income. Such expenses include depreciation on fixed assets and intangible assets transferred for temporary use:
Debit 91-2 “Other expenses”
Loan 02 “Depreciation of fixed assets”,
05 “Amortization of intangible assets”,
as well as expenses for repairs of leased fixed assets:
Debit 91-2 “Other expenses”
Credit 10 “Materials”,
70 “Settlements with personnel for wages”,
69 “Calculations for social insurance and security”,
23 “Auxiliary production”,
60 “Settlements with suppliers and contractors”;
• expenses associated with participation in the authorized capitals of other organizations, if participation in the authorized capitals is not the subject of the organization’s activities:
Debit 91-2 “Other expenses” Credit 76 “Settlements with various debtors and creditors”;
expenses associated with the sale, disposal and other write-off of fixed assets and other assets other than cash (except foreign currency), goods, and products. Such expenses include: a) the residual value of sold (disposed of for other reasons) fixed assets:
Debit 91-2 “Other expenses” Credit 01 “Fixed assets”,
subaccount “Retirement of fixed assets”,
b) residual value of sold (disposed of for other reasons) intangible assets:
Debit 91-2 “Other expenses”
Credit 04 “Intangible assets”,
c) actual cost of materials sold: Debit 91-2 “Other expenses”
Credit 10 “Materials”,
16 “Deviation in the cost of material assets”,
d) expenses directly related to the disposal of property (expenses for dismantling fixed assets, transportation, etc.):
Debit 91-2 “Other expenses”
Credit 23 “Auxiliary production”,
60 “Settlements with suppliers and contractors”,
70 “Settlements with personnel for wages”,
69 “Calculations for social insurance and security”;
interest paid by an organization for providing it with funds (credits, borrowings) for use:
Debit 91-2 “Other expenses”
Credit 66 “Settlements for short-term loans and borrowings”,
67 “Settlements for long-term loans and borrowings”;
• expenses related to payment for services provided by credit institutions:
Debit 91-2 “Other expenses”
Credit 51 “Current accounts”;
• contributions to valuation reserves. Accounting rules provide for the creation of three valuation reserves: for doubtful debts, for the depreciation of financial investments, and for a decrease in the value of material assets.
The reserve for doubtful debts is created based on data from the inventory of accounts receivable in the event of doubtful debts being identified. Doubtful debt is an organization's receivables that are not repaid within the time limits established by the agreement and are not secured by appropriate guarantees.
The amount of the reserve is determined separately for each doubtful debt, depending on the financial condition (solvency) of the debtor and the assessment of the likelihood of repaying the debt in whole or in part. The accrual of the reserve in accounting is reflected by the entry:
Debit 91-2 “Other expenses”
Credit 63 “Provisions for doubtful debts”.
The reserve is used to write off unclaimed debts previously recognized by the organization as doubtful:
Debit 63 “Provisions for doubtful debts”
Credit 62 “Settlements with buyers and customers”, 76 “Settlements with various debtors and creditors”.
A reserve for impairment of financial investments is created for those financial investments for which the current market value is not determined, in the event of a sustainable decline in their value. For such financial investments, the estimated value is determined, equal to the difference between their accounting value and the amount of reduction in value.
A sustainable decrease in the value of financial investments is characterized by the simultaneous presence of the following conditions: 1) on the reporting date and on the previous reporting date, the accounting value is significantly higher than their estimated value; 2) during the reporting year, the estimated value of financial investments changed significantly only in the direction of its decrease;
3) at the reporting date there is no evidence that a significant increase in the estimated value of these financial investments is possible in the future.
The reserve is created based on the results of checks for the presence of conditions for a sustainable decline in the value of financial investments, which are carried out at least once a year as of December 31 of the reporting year if there are signs of impairment. The organization has the right to carry out this check on the reporting dates of the interim financial statements. If the impairment test confirms a sustained significant decline in the value of financial investments, the organization creates a reserve for impairment of financial investments in the amount of the difference between the book value and the estimated value of such financial investments. An entry is made for the amount of the created reserve: Debit 91-2 “Other expenses”
Credit 59 “Provisions for impairment of financial investments.”
If the value of securities for which reserves were previously created increases, as well as in the event of their disposal, the corresponding amount of the reserve is added to operating income: Debit 59 “Provisions for impairment of financial investments”
Credit 91-1 “Other income”.
Reserves for reducing the value of material assets are created at the end of the reporting year when preparing annual financial statements for inventories if the following conditions are met: 1) if they are obsolete, have completely or partially lost their original quality; 2) if their current market value (the “sale” value) has decreased.
The reserve is accrued if the actual cost of inventories is higher than their current market value. The market value must be documented. The amount of the reserve is determined as the difference between the actual cost of inventories and their current market value. The formation of the reserve is reflected in the accounting entry: Debit 91-2 “Other expenses”
Credit 14 “Reserves for reduction in the value of material assets.”
In the next reporting period, as the material assets for which the reserve was formed are disposed of, the reserved amount is restored:
Debit 14 “Reserves for reduction in the value of material assets”
Credit 91-1 “Other income”.
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Net Operating Income - Formula
As can be seen from the contents of the lists, income and expenses practically coincide in their economic purpose. In this regard, the ratio of operating expenses to operating income is used when calculating profit for other facts of business activity. Separate accounting allows you to determine net operating income:
Net operating income is: The amount of VA (the actual amount of gross income) – the amount of OP (operating expenses excluding depreciation).
The indicator characterizes the amount of net profit from the use of property, contributions to the authorized capital, investments in securities, and other types of income. It is economically important to calculate the NIR for the current period. But a one-time positive result is not a guarantee of profit in future periods.
The ratio of operating expenses to the company's sales revenue will help to calculate the operating expense ratio, which characterizes the dynamics of the profitability of overall activities. The lower the value obtained, the more profit the company has for the reporting period. The higher the coefficient, the more significant the business costs to maintain its livelihoods.
KOR (OER) = OR / Total income
An enterprise can establish formulas for calculating operating income and operating expenses independently, adhering to the legislative norms of PBU 9/99 and 10/99. It is recommended to measure performance indicators on the basis of financial (accounting) reporting data. Calculations are made for a period - month/quarter or for the reporting year.
Other expenses and income in accounting
According to general standards, other expenses and income are included in account 91. Profit is accounted for on credit, loss is accounted for in debit. For complete control, first-order subaccounts are opened:
- 1 – to take into account profit;
- 2 – to take into account expenses.
Notes on these sub-accounts are made in accounting cumulatively throughout the reporting period. Based on the results, the ratio of other expenses and profit is displayed, which is already noted in subaccount 91.9 (also, for debit - loss, and income - for credit).
Important to remember! Analytical activities should help determine the financial results for each specific operation.
To divide profits and costs into operating, emergency and non-operating, an enterprise can independently draw up a chart of accounts, certified in a local document, or use industry documents.
For example, for agro-industrial organizations, the scheme of accounts was issued by Order of the Ministry of Agriculture No. 654 in 2001. It allows medium and large companies to record other profits and expenses using the following subaccounts:
- 1 – operating income;
- 2 – operating expenses;
- 3 – non-operating income;
- 4 – non-operating expenses;
- 9 – balance of other indicators.
The final balance of subaccount 91.9, regardless of the case at the end of each month, is closed to account 99.
