Every company prepares an income statement that shows how it derives revenues from its operations. On top of that, it also reports on expenses related to those activities. Usually, this area includes the operating profits or losses from activities only. After that, the income statement also presents non-operating income and expenses. Within that, it may consist of other income.
What is Other Income?
Other income is a line item on the income statement that may appear for companies from time to time. Usually, it includes any profits or income from activities that are not a part of a company’s operations. Other income consists of any items that provide economic inflows during a period. However, these inflows do not generate from transactions that are a part of core activities.
Other income can come from various sources. Companies do not generate these as a part of their primary operations. Therefore, they cannot classify the income as revenues. However, accounting standards still require companies to report all their income and expenses. Other income covers any earnings that do not fall under the revenues category in the income statement.
How does Other Income work?
The income statement includes a record of the income and expenses generated by a company. Usually, it classifies that income as revenues. However, it only consists of earnings through core activities. Since these activities differ from one company to another, the items that go into revenues also vary. However, not every income can fall into that category. Companies can also generate money from other activities.
Accounting standards do not allow companies to report income from other activities as revenues. These activities do not occur regularly for most companies. Therefore, companies do not report them as separate items on the income statement. Instead, they include any earnings from those activities under other income. This category appears after operating activities in the income statement.
What does Other Income include?
Other income includes earnings from various sources. As mentioned above, these earnings do not occur regularly for most companies. Nonetheless, when any income from those sources arises, it will fall under this category. For most companies, other income covers the following areas.
- Profits on the sale of a fixed asset.
- Interest charged from customers on late payments.
- Interest income from loans to third parties or customers.
- Scrap sales.
- Income from insurance claims.
- Rental income from investment properties.
What is Other Income in tax?
Other income often gets associated with accounting. However, it may also appear on tax forms. In the US, Form 1040 requires taxpayers to report other income. This form includes specific lines dedicated to some types of earnings for taxpayers. However, it may not cover earnings from all sources. Therefore, it contains a section to report other income as well.
Essentially, other income includes all income that a taxpayer receives that is not wage-related. The IRS also provides Schedule 1, where taxpayers can report all sources related to that income. Usually, other income in tax consists of the following sources.
- Earnings from self-employment
- Retirement income.
- Investment income.
- Foreign income.
- Earnings through the cancellation of debt
Conclusion
In accounting, other income refers to any gains from non-operating activities. Usually, companies report their income from operations in revenues. However, they may also earn from other sources. Those sources go under other income. It includes rare items, such as gains from fixed asset sales, interest income, scrap sales, etc. Similarly, other income may appear in tax forms and returns.
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