A financial statement typically enlists different kinds of records. Some of these records are for different income indices while others are for expenses.
Many of these items in a financial statement represent a category, that is, a group of related records. The items under each category are recorded under them with each category starting on a fresh line.
This arrangement helps give clarity of information on a financial statement. At a glance, you can see the position of an item and where it belongs.
What is a Line Item?
A-Line Item in Accounting is a record that represents a category of incomes and expenses under one head.
By IAS standard, a line item has its weight and should be recorded on a separate line. Incomes and expenses under each category can then be itemized under the line item.
For example, Sales expenses is a list item in a financial report. All expenses under the sales expenses are recorded under that category. Administrative expenses are another different category and must come on a new line.
Examples of line items enlisted in an Income Statement are:
- Cost of Sales
- Administrative expenses
- Sales Expenses
- Cost of Goods Sold
- Interest Expenses
- Tax expenses
Grouping your incomes and expenses in a line item system affords you a clearer view of the records. A very important line item are in Line Item Budgeting.
Line Item Budget
Line Item Budgeting is the simplest budget model for building budgets. It is mostly used by small businesses whose records are still not plenty and complicated.
The essence of a business budget is to compare income and expenses to ensure appropriate allocation of resources and maximize profits.
To be able to properly forecast a company budget, you will need to analyze the company’s historical data. The financial statements over past years provide useful information about past trends in income and expenses.
With these patterns and trends, you can predict future possible income and expenses rates and make inferences from there.
Let’s consider a simple example. SaltyBite Restaurant records four basic line items in their annual financial statement: Revenue, Gross Profit, Sales Expenses, and Tax. They want to forecast their annual Net Income based on their previous records.
The restaurant recorded in her previous year’s financial statement a total Revenue of $6,000 and a Gross Profit of $4,000. After deducting a total of $1200 as sales expenses and $500 as tax, they reported a Net Income of $2,300.
With these numbers, they want to prepare their budget for the next year. So they forecast a total Revenue of $8,000 and a Gross Profit of $6,500.
Their expected sales expenses total $1400 and tax estimated at $600. So, the expected Net Income for the year will be $4,500.
A company’s financial statements capture a whole lot of different kinds of incomes and expenditures and look complicated at first glance.
Grouping these records into categories enlisting related incomes and expenditures helps reduce ambiguity and makes the report easier to decipher.