Interest income, a sublease, and YouTube ad revenue are all money coming in, and none of them tell you anything about how your business performs. That is why they sit below the line. Stephen Brown explains what belongs in other income and expenses, how private companies use the section strategically for owner add-backs, and how moving tax, depreciation, and amortization down there turns net operating income into EBITDA.
Profitability
Other Income & Expenses Explained: Income Statement (Profit and Loss) for Ecommerce Sellers
3 min
Transcript
0:00 What other income is
I'm Stephen with LedgerGurus, and in this video I'm gonna explore a topic that might be a little bit confusing, other income and expenses.
Let's kick off with other income. It's not your primary sales revenue. Think of it as the extras you earn. Say you earn some money from interest or investments, that's other income. If you monetize your YouTube content, the ad revenue, like we do here at LedgerGurus, that too could be other income, especially if it's insignificant compared to your primary business. Another example is you have some extra space in your warehouse or your office and you decide to sublease it. It's not your primary business, other income.
Now, the reason you don't want that income in income is it's not related. You want to compare your core business's income and expenses, and so you park the other income down below in the other income section. So all this isn't your primary business, and you don't want it to muddle what's actually going on up above the income statement, and so you put it down below into the other income section.
0:53 What other expenses are
On the flip side, you have other expenses. These aren't your day-to-day: payroll, ads, cost of goods sold. They're stuff that's not really related to operating the business.
Now, there are rules for how publicly traded companies should use other expenses, but for private companies, you have some discretion. They can be used strategically to move certain expenses off the main part of your income statement.
1:15 Add-backs and owner expenses
One example would be owner expenses that are sometimes referred to as add-backs at the time of a sale. These are expenses that are discretionary, non-recurring, and oftentimes personal in nature.
An example would be an owner taking a vehicle and purchasing it with a business, legally applying those expenses to the business for tax reduction purposes. But said vehicle isn't core to the business, just taking advantage of the tax code. By putting in other expenses, it will help an investor or a buyer or an owner itself understand the core profit-making capability of the business.
On that point, you could put all your tax, depreciation, and amortization expenses down into other expenses and essentially turn your net operating income into an EBITDA calculation.
1:55 Why it matters
Other income and expenses are normally significantly smaller than the operating income and expenses for a business. It is important to understand the other income and expenses because they'll sometimes increase, but more often decrease, what is ultimately your net income.
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