Definition
“Above the line” and “Below the line” are both terms in finance that refer to different types of income and expenses. “Above the line” items are those associated with the company’s normal business operations, such as sales and production costs. In contrast, “Below the line” items are non-operational, like income from investments or losses from sales of assets.
Key Takeaways
- ‘Above the Line’ and ‘Below the Line’ are two types of advertising strategies. Above the Line (ATL) refers to mass-marketing techniques that seek to reach a broad audience, like TV, radio, or newspaper ads. Below the Line (BTL), on the other hand, consists of targeted, individualized marketing such as social media marketing or search engine advertising.
- When used in the context of financial documents, ‘Above the Line’ items are ones that directly affect the calculation of net income, such as revenues and expenses. Conversely, ‘Below the Line’ items are those that come after net income, like distributions to shareholders or income from discontinued operations. They don’t impact the bottom line of the income statement directly, but they do influence comprehensive income.
- The terms ‘Above the Line’ and ‘Below the Line’ can also be used in budgeting. ‘Above the Line’ expenses are core, essential costs that you have to cover, such as rent or bills. ‘Below the Line’ expenses, meanwhile, are discretionary spending, such as eating out or entertainment, which you can cut back on if you need to save money or reduce expenditure.
Importance
Above the Line and Below the Line are important finance terms that are traditionally used in accounting and finance to describe different types of costs and incomes. Above the line refers to revenues and costs directly related to, or derived from, the core operations of a business.
Therefore, it essentially represents operating income and expenses. On the other hand, Below the Line items are typically one-time or non-operational in nature.
They are not directly related to everyday business operations, meaning they refer to non-operating incomes and expenses, taxes, and extraordinary items. Understanding the distinction between these two is crucial as it aids in the analysis of a company’s performance, its profitability, and its overall financial health.
By differentiating regular operational expenses from unique, non-recurring ones, businesses can develop more accurate financial forecasts and make better strategic decisions.
Explanation
“Above the Line” and “Below the Line” are terms used in accounting and finance to segregate certain revenue and cost items on a company’s profit and loss statement, defining what impacts the company’s operating performance and what does not.
The purpose of this segregation is to distinguish between core and non-core activities of a company’s operations, which is insightful for analysts and decision-makers to understand the sources of a company’s profitability.
“Above the Line” refers to revenues and costs related to a company’s primary operations, the core activities, including sales revenue, cost of goods sold (COGS), and other operating expenses like research and development, selling, general and administrative costs (SG&A). “Below the Line,” on the other hand, refers to irregular items, non-recurring, or non-operational costs and revenues that are not typical to daily business operations, including interest income or charges, gains or losses from sales of assets, taxations, or extraordinary items.
A focus on these indices allows for a cleaner and more accurate assessment of a company’s operational efficiencies and core profitability.
Examples of Above the Line vs Below the Line
Marketing Expenditures: In marketing and advertising, ‘Above the Line’ refers to marketing expenditures on mass media promotional efforts, like TV commercials, radio ads, and social media campaigns. These efforts are directed towards a broad audience and not targeted at a specific consumer group. On the contrary, ‘Below the Line’ marketing includes more targeted and direct forms of promotion like direct mail campaigns, email marketing, or trade shows, that are specifically addressed to individual customers or businesses.
Film Production: In the film industry, ‘Above the Line’ costs refer to the costs incurred for the creative talent involved in film production, like actors, directors, producers, and writers, that are generally negotiated before production begins and are typically set. ‘Below the Line’ costs, on the other hand, refer to technical and crew costs, post-production costs, and costs incurred for special effects, sets, costumes, etc. These costs are usually variable and tend to change during the production process.
Corporate Profits and Deductions: In business accounting, ‘Above the Line’ often refers to gross income figures and includes all the income or profits before the deductions and taxes. It presents the revenue generated by your business. ‘Below the Line’ generally represents the profits after the deductions, taxes, and cost of goods sold (COGS) have been taken into account. It provides a more accurate representation of what the company is making in real terms after it has accounted for all expenses.
FAQ: Above the Line vs Below the Line
What does Above the Line mean in finance?
Above the Line refers to income and expense items that significantly affect your calculated tax. It includes entries like revenue, cost of goods sold, and operating expenses. Adjustments consisting of income and deductions that appear on the top half of a company’s income statement are considered to be ‘above the line’.
What does Below the Line mean in finance?
Below the Line refers to accounting practices where items impact a company’s net income. They refer to entries that typically occur infrequently or are non-operational, like interest income or expenses, gains or losses from investments, and taxes.
Why is the distinction between Above the Line and Below the Line important?
The distinction is important as it helps in analyzing the regular operational performance of a business without distortions caused by irregular or non-operational activities. Above the line items directly influence the business operation while below the line items reflect the financial and accounting consequences of operational decisions.
What are some examples of Above the Line items?
Some common examples of Above the Line items include salary expenses, rent and utility costs, and depreciation and amortization costs. These are all costs that are required to functionally run a business.
What are some examples of Below the Line items?
Examples of Below the Line items could be income or losses from investments, benefits or charges from tax law changes, and restructuring costs. These items are typically non-operational and can considerably affect a company’s reported income.
Related Entrepreneurship Terms
- Profit and Loss: This is a financial statement that reveals a company’s revenues, costs, expenses, and overall profitability within a specific period. “Above the line” items are included in the calculation of gross profit, while “below the line” items typically affect net income.
- Operating Expenses: These refer to the necessary costs of running a company that are segregated “above the line” on the income statement. They typically include costs like salaries, utilities, and rent.
- Non-Operating Expenses: These are costs not related to the core operations of a business and are listed “below the line.” Examples might include interest paid on loans or losses from selling assets.
- Earnings Before Interest and Taxes (EBIT): EBIT, also known as operating income, includes all income and costs “above the line.” It does not account for “below the line” entries like financial costs or taxes.
- Discretionary Expenses: These are optional costs that can be adjusted or eliminated if necessary, often considered to be “below the line”. They could include costs for advertising, promotional activities, and more.
Sources for More Information
- Investopedia – Offers a comprehensive database of resources and information on a wide variety of financial terms and concepts, including Above the Line vs Below the Line.
- Accounting Tools – Provides detailed information and resources on the field of accounting and financial management, including the concepts of Above the Line and Below the Line.
- The Balance – This site hosts a range of articles that cover finance-related topics extensively, including Above the Line vs Below the Line.
- Corporate Finance Institute – Offers a variety of lessons and resources dedicated to teaching financial concepts, including an explanation of Above the Line vs Below the Line.
