What is Business Operating Activity

Only revenue and expenditure connected with trading is operating activity. Non-operating revenue and expenditure are exceptional items.

Operations

Sales, purchases of goods for resale and the overheads and expenses that are directly linked to core trading activity describe operating activity. Anything else is only added to or deducted from to the profit and loss account once the operating profit has been calculated.

Cost of Goods

The manufacture or amendment of finished goods prior to sale all form part of purchasing. For example if finished goods are brought in and subsequently relabelled, the cost of labour and materials used for that should be added to purchases; not deducted as an overhead.

Sales Operating Activity

Apart from revenues directly connected with the sale of stock / inventory items, profits or losses arising from the sale of any asset in the balance sheet are not shown in the profit and loss statement until the operating profit has been finalised.

All revenues associated with sales, including charges made to customers for making deliveries, service charges, royalties and license fees belong to sales operating activity.

Operating Overheads and Expenses

Wages; selling, administration and depreciation overheads represent operating overheads as long as they are wholly and exclusively incurred for the purpose of trade.

The cost of interest is not part of operating activity as this is concerned with servicing debt, not trading.

Exceptional Income and Expenditure

Investment income is shown as net of any costs associated with it, such as consultancy and management fees or service charges. Profits or losses on the sale of fixed assets are also defined as exceptional items.

The values for net book profits or losses shown in the accounts for fixed assets will most likely differ from the values that will apply for corporation tax relief. For more on this follow the link below.

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