What Is Above the Line vs. Below the Line in Accounting?

By Indeed Editorial Team

Published September 21, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Accounting involves many processes and concepts that are essential in accurately determining the performance of a business. Correctly categorizing income statement entries, such as income and expenses, is an important aspect of accounting. Learning about the differences between above-the-line and below-the-line entries may be helpful if you're an accounting and finance professional or considering this field as a career path. In this article, we discuss the importance of understanding above-the-line vs. below-the-line items in an income statement, define these terms, and discuss their similarities and differences.

Above-the-line vs. below-the-line items in an income statement

Understanding the difference between above-the-line vs. below-the-line accounting helps an organization see how successful its business is versus how much revenue it's generating. Both items are useful in managing available resources to achieve surplus results. For example, on an income statement, above the line refers to the income and expenses resulting from a company's regular operations, while below-the-line entries describe the company's extraordinary expenses and income that don't affect its overall revenue.

Related: Bottom Line vs. Top Line (With Tips for Growing Them)

What is above the line?

Above the line (ATL) focuses on a company's gross business revenue and explains the income and expenses resulting from normal business operations. ATL entries are vital to the company because they determine the overall health of the business.

In income statements, the ATL generally begins with the first revenue line, which many refer to as gross revenue. This is the amount of money the company generates through its primary operations. The subsequent lines are usually the expenses directly related to generating revenue and are an essential part of the business. ATL expense entries in an income statement typically include:

Cost of goods sold (COGS)

The COGS is the necessary cost to produce the products a company sells. This often includes the cost of raw materials and labour. This entry may also include direct factory overhead costs, which are expenses a company incurs in its manufacturing processes, such as the repair and rental of equipment or machinery. The COGS entry is above the line because it's a direct expense essential to determining a company's gross profit. Manufacturing businesses typically equate ATL costs with COGS.

Cost of sales (COS)

The COS entry describes costs relevant to selling goods or providing services. This includes sales and marketing expenses, such as the cost of advertisements, salaries of sales associates, and the cost of events to attract new customers. While manufacturing companies may refer to their ATL costs as COGS, companies in the service industries usually equate these costs with COS. Deducting COS from revenue enables a company to calculate its operating profit.

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What is below the line?

Below-the-line (BTL) entries refer to the income and expenses that don't affect a company's profit and loss accounts. These costs don't relate to a company's normal operations, such as insurance premiums it receives or pays, taxes, interest income, and loan interest it pays lenders. BTL entries may also be expenses related to the cost of doing business, such as rent, payroll, and utilities. While these expenses aren't directly related to producing goods or services, they're necessary to operate the business.

On income statements, BTL entries come after the gross profit line and before net profit. They're important to understand because they show a company's true earnings. If a company hasn't deducted the BTL expenses from its gross or operating profit, it often has an inaccurate understanding of its business performance.

Characteristics of BTL expenses

The BTL costs might be recurring or non-recurring. Recurring expenses occur regularly, and the company expects to incur them again, for example, salaries and the monthly cost of rent. Non-recurring expenses are those the company incurs occasionally or only once, such as an insurance premium payment or the cost of replacing equipment. Many companies consider these extraordinary, special, or one-time expenses because they don't occur regularly.

Related: Guide to Basic Accounting (With Concepts and Explanations)

Similarities between ATL and BTL

While entries for above- and below-the-line costs are unique, there are similarities between these two classifications. Knowing these may help you better understand and apply this accounting principle when recording entries on a company's income statement. ATL and BTL are similar, as they both:

Indicate profit margin

Profit margin is a profitability ratio that describes what percentage of a company's sales turned into profit. Both ATL and BTL items are useful in solving for its two main types. Companies consider gross revenue and ATL expenses, particularly COGS or COS, to determine their gross or operating profit margin. When calculating the net profit margin, companies consider BTL income and expense entries and how these affect gross profit.

Help determine a company's bottom line

Companies compute ATL and BTL items to help their bottom line. The bottom line is a financial metric that represents a company's net income or loss. It's the result of deducting all expenses from net revenue or sales. The bottom line serves as a final reference point for determining a company's profitability. It's essential that companies know which income and expenses are ATL or BTL because the position of these entries on the income statement can affect their profitability calculations.

Refer to costs incurred by the business

While BTL entries also include specific types of income a company made, such as interest or royalty income, in general, both ATL and BTL items represent the company's expenses. The ATL entry includes costs associated with production, and the BTL entry comprises extraordinary expenses or those related to business operations.

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Differences between ATL and BTL

Some people confuse above- and below-the-line costs because of their similarities. Instances can also occur where an ATL expense for one business may be a BTL cost for another, which can cause confusion. For example, the rent of physical space might be an ATL expense for a retailer but a BTL recurring cost for an accounting firm.

There are also cases when an item might be both a BTL and an ATL entry. For example, the salaries of employees who are part of the production process are often an ATL entry, while management payroll is usually a BTL expenditure. It's important to know the differences between ATL and BTL to classify income and expenses correctly and better understand a company's financial health. Here are some ways that ATL and BTL differ:

Expenses listed

While there may be similarities in some expenses ATL and BTL represent, the costs are typically specific to each category. Above-the-line costs include COGS or COS for businesses in service-based industries. Below-the-line costs include taxes, interest payments, and operating expenses.

Related: What Are Accounting Transactions? (Definition and Examples)

Predictable vs. unpredictable items

ATL costs generally comprise predictable operational income and expenses, whether producing goods or rendering services. It's important to remember that inflation plays a role in influencing these costs. Companies estimate their ATL costs and adjust them accordingly to maintain profit margins.

BTL entries include unexpected income and expenses occurring within an accounting period. Unexpected expenses might comprise service repairs, equipment acquisition or replacement, or insurance payouts. While unexpected earnings are much less common, they may include an increase in the company's share price.

Related: What Are Accounting Principles and Why Are They Important?

Net profit vs. gross profit

The ATL entries are useful for determining a company's total gross profit, while BTL items calculate the total net profit for a set period. When computing gross profit, companies deduct all the ATL costs from their revenue or sales. They then subtract BTL expenses and add BTL income entries to the gross profit to determine net profit. It's important to remember that both processes are necessary to compute a company's profit margins accurately.

One-time vs. repetitive costs

Companies usually record ATL costs as they occur and can plot these easily during the normal course of operations. A company classifies ATL costs as repetitive because they occur more than once throughout each production cycle or business period. Although there are repetitive BTL entries, companies generally record non-repetitive or one-time expenses as BTL costs. As a company can't estimate non-repetitive costs, it may be unable to adjust its budget to provide for them when preparing production or business cycles.

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