Below the Line
Refers to a term in finance or accounting that describes a type of cost
What Is Below the Line?
Below the line (BTL) refers to a term in finance or accounting that describes a cost type. In other words, they are costs below the “line” of gross profit and do not influence a firm’s reported profits.
In other words, below the line refers to the money spent on goods of capital expenditure. This includes funds to acquire or upgrade physical assets and machinery, like buildings, computers, and more, to enhance productivity or competitiveness.
Although this is crucial for utilities and manufacturing goods and services that help to drive growth and generate revenue, the money spent is classified as capital expenditures. So, it does not directly affect the firms’ profits in calculations or statements.
Thus, these costs can be shifted from an income statement to a balance sheet and not charged directly to expenses.
Some firms try to use this to their advantage by categorizing some of their expenditures as below the line to show investors that they are doing better than the reported profits or losses seem to imply.
Key Takeaways
- Below the line refers to the costs below the “line” of the company’s gross profit and does not influence the profit or loss account on an income statement.
- It does not directly affect the firms’ profits but can influence their reputation and, sometimes, a somewhat inaccurate image of greater financial health. In reality, they may be struggling or trying to recover from losses.
- Below-the-line costs usually include operating expenses and amounts paid in taxes, while above the line include the cost of goods sold and the cost of sales/services.
- Above the line are recurring expenses, while below the line are extraordinary, one-off, non-recurring, and sometimes unexpected expenses.
- Below the line, encompass the other expenses, like the salaries of other employees working in HR, advertising, and the cost of miscellaneous items for the office (not manufacturing), such as printing paper.
Understanding Below The Line
Below-the-line costs are typically unexpected and non-recurring costs. In addition, they do not come up in a company’s daily operations. They can create a more accurate picture of a firm’s financial health because inflation does not influence these costs.
So, below-the-line costs include spending on operational aspects of production, interest, and taxes that the firm must pay.
In accounting, below the line is associated with a firm’s unusual costs or income, which are factored into the company’s actual total profit. Examples of this include insurance settlements and payouts from lawsuits.
Meanwhile, in the realm of taxes, it relates to costs that can decrease the amount of taxable income.
These costs are taken directly from the reserves instead of charged against the profits. This is to avoid having one-off revenues or costs influence the trading profit.
Below the Line vs. Above the Line
With the information above, the “line” thus refers to the gross profit. It distinguishes between the items below and above this threshold and their respective monetary values.
On income statements, above the line (ATL) usually refers to the sales and cost of goods sold (COGS for short) or cost of sales/services (COS).
However, differentiating these costs and expenses is not always straightforward. So, the accounting departments of various companies have to carefully decide what to include within their costs of goods and what should be categorized elsewhere.
For example, in a manufacturing company, the cost of goods sold includes factors like the wages of employees working on the manufacturing process and the costs of the materials used.
Meanwhile, items excluded from the equation would be variables such as the cost of resources used by the accounting department, like paper, and the wage of the human resources manager in the office.
However, there are other items that are not as distinguished and categorized. Examples of these include the salaries of the plant supervisors and sales commissions.
It is essential to differentiate BTL and ATL expenses because below-the-line items can create a misleading image of the company’s actual business and financial performance.
Thus, they can use this in their income statements to make the company appear more profitable than it is in reality, which influences their objective and reputation, especially during recessions.
For instance, the company can obtain a sizable non-recurring revenue after selling an underutilized resource. This may create a false image that the firm has strong revenues while they may really be struggling financially.
However, this can help the company offset any operating losses from its income statement and seem more profitable to investors, which may aid the company’s performance and trajectory of growth. So, the idea behind BTL plays a prominent role.
This ensures the company is earning non-GAAP earnings. These are essentially earnings that do not have to follow the financial reporting requirements for public companies.
Below and Above the Line Important Difference
The main differences between ATL and BTL are deconstructed in the following table:
| Characteristics/Dimensions | Above The Line (ATL) | Below The Line (BTL) |
|---|---|---|
| The rate at which it arises |
|
|
| Predictability |
|
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| Importance related to gross vs net profit |
|
|
| Type of costs |
|
|
Since categorizing the type of costs is not always clear, the accounting department steps in. They decide if the expenses are directly related to manufacturing or are considered operating expenses, similar to the human resources manager's salary or “cost”.
Examples of Below the Line
Here are a few examples of how ATL and BTL expenses arise on company income statements and calculations.
Example 1: Suppose the income statement of a specific company details some expenses as follows:
| Costs/Expenses | Amount (000s) |
|---|---|
| Revenue | 120 |
| Cost of goods sold | (60) |
| Gross profit | 60 |
| Operating expenses | (40) |
| Operating profit | 20 |
| Taxes | (15) |
| Net profit | 5 |
Here, the cost of goods sold is above the line of the gross profit, while operating expenses, operating profit, and taxes are below.
Example 2: A textile manufacturing company wants to sell 150 pieces of clothing during its next production cycle. To produce one item, the company must pay each worker $35, and each article of clothing has an associated manufacturing cost of $15. The company wishes to sell each item for $55.
The total revenue acquired after selling 150 pieces of clothing is $6,000. The above-the-line costs in this scenario are the workers' wages, the yarn's cost, and other raw materials. Therefore, the above-the-line costs are equal to $5,100.
Gross profit = Revenue – Total Above-The-Line Costs
So, gross profit = $6,000 – $5,100 = $900
One day, a sudden error occurred in the conveyor belt system of the factory. The repairs will cost the company $250, and they must pay a property tax of $320. The cost of the repairs and the amount paid as tax are both considered within the below-the-line costs.
Net profit = Gross Profit – Total Below-The-Line Costs
So, net profit = $900 (from above) – $570 = $330
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