What is operating accounting?
Operating income and expenses are the part of the financial statements that show the company's operating income and expenses from day-to-day business activities. This differs from the general ledger in that it focuses exclusively on the core business and excludes financial items and extraordinary events.
The operating statement is a critical tool for management to evaluate how profitable the business itself is, regardless of the financing structure and one-time events.
What is Operating Accounting?
The operating statement presents the company's operational results and provides a clear picture of how well its core business is performing. It is a part of the income statement that focuses specifically on operations.
Main components of the Operating Account:
- Operating income: All income from normal business activities
- Operating costs: All costs associated with daily operations
- Operating profit: The difference between operating income and operating expenses
Structure of the Operating Account
A typical Norwegian operating account follows a standardized structure that makes it easy to compare companies and analyze development over time.
Detailed Structure:
| Description | Example | |
|---|---|---|
| Sales revenue | Revenue from sales of goods/services | 10,000,000 |
| Other operating income | Rental income, subsidies, etc. | 500,000 |
| Total operating income | Total operating income | 10,500,000 |
| Cost of goods | Cost of goods sold ( COGS ) | 6,000,000 |
| Salary cost | Salaries and social costs | 2,500,000 |
| Depreciation | Depreciation on operating assets | 300,000 |
| Other operating costs | Rent, marketing, etc. | 800,000 |
| Total operating costs | Total operating costs | 9,600,000 |
| Operating profit | Results from core business | 900,000 |
Operating Revenues - Detailed Overview
Operating income includes all income that comes from a company's normal business activities . This is the foundation for assessing a company's operational strength.
Main categories of Operating Income:
1. Sales revenue
- Merchandise sales: Revenue from the sale of physical products
- Service sales: Revenue from services provided
- Subscription Revenue: Recurring revenue from subscriptions
2. Other Operating Income
- Rental income: From renting out premises or equipment
- Royalties: From licensing agreements and intellectual property rights
- Public grants: Support related to operations
- Gain on sale of fixed assets: When sales price > book value
Accounting for Operating Revenues:
When selling goods (100,000 NOK):
Debet: Kundefordringer 100 000
Kredit: Salgsinntekt 100 000
Operating Costs - Complete Analysis
Operating expenses are all costs incurred in connection with the day-to-day running of a business. Effective cost management is essential for profitability.
Main categories of Operating Costs:
1. Cost of goods sold
The cost of goods sold during the period, calculated as: Cost of goods = Inventory at the beginning + Purchases - Inventory at the end
2. Salary costs
- Basic salary: Fixed salary for employees
- Overtime pay: Extra compensation for overtime
- Employer's tax : Tax on wages
- Pension costs: Contributions to pension schemes
- Other personnel-related costs: Courses, travel, etc.
3. Depreciation
Systematic distribution of the acquisition cost of operating assets over their useful life.
4. Other Operating Costs
- Rent and local costs
- Marketing and advertising
- Telephone and communication
- Insurances
- Maintenance and repairs
- Office supplies
- Auditing and accounting
Cost categorization:
| Cost category | Description | Examples |
|---|---|---|
| Variable costs | Changes with activity level | Raw materials, commissions |
| Fixed costs | Regardless of activity level | Rent, insurance |
| Semi-variable costs | Partly fixed, partly variable | Telephone, electricity |
Operating result - Analysis and Interpretation
Operating profit is perhaps the most important single item in the operating accounts as it shows how profitable the core business is.
Calculation of Operating Profit:
Operating profit = Operating income - Operating expenses
Key figures for Operating Profit:
1. Operating margin
Operating margin = (Operating profit ÷ Operating revenue) × 100
| Industry | Typical Operating Margin |
|---|---|
| Retail | 2-5% |
| Technology | 15-25% |
| Production | 8-15% |
| Services | 10-20% |
2. Operating profit per employee
Operating profit per employee = Operating profit ÷ Number of employees
Interpretation of Operating Profit:
- Positive operating result: Core business is profitable
- Negative operating profit: Operating expenses exceed revenues
- Increasing operating profit: Improved operational efficiency
- Declining operating profit: May indicate operational challenges
The difference between Operating and General Ledger Accounts
It is important to understand how the operating statement differs from the complete income statement.
Comparison:
| Aspect | Operating accounts | General ledger |
|---|---|---|
| Focus | Operational activities only | All activities |
| Includes | Operating income and expenses | All income and expenses |
| Excludes | Financial items, tax, extraordinary items | Nothing |
| Performance targets | Operating profit | Annual result |
| Application | Operational analysis | Overall rating |
Example of Complete Income Statement:
DRIFTSREGNSKAP:
Driftsinntekter 10 500 000
Driftskostnader -9 600 000
Driftsresultat 900 000
FINANSPOSTER:
Finansinntekter 50 000
Finanskostnader -150 000
Profit before tax 800,000
TREASURE:
Tax expense -176,000
ANNUAL PROFIT 624,000
Practical Examples from Norwegian Industry
Let's look at how operating accounting works in practice through specific examples from different industries.
Example 1: Retail
Situation: A clothing store with the following figures for 2023:
| Amount (NOK) | |
|---|---|
| Sales revenue | 5,000,000 |
| Cost of goods | 3,000,000 |
| Salary cost | 1,200,000 |
| Rent | 400,000 |
| Other operating costs | 300,000 |
Calculation: - Operating income: 5,000,000 - Operating costs: 3,000,000 + 1,200,000 + 400,000 + 300,000 = 4,900,000 - Operating profit: 5,000,000 - 4,900,000 = 100,000 - Operating margin: (100,000 ÷ 5,000,000) × 100 = 2%
Example 2: IT Consulting Company
Situation: An IT consulting company with the following operating accounts:
| Amount (NOK) | |
|---|---|
| Consulting income | 8,000,000 |
| Salary cost | 5,500,000 |
| Office rent | 600,000 |
| IT equipment (depreciation) | 200,000 |
| Other operating costs | 400,000 |
Analysis: - Operating profit: 8,000,000 - 6,700,000 = 1,300,000 - Operating margin: 16.25% (very good for the industry) - Salary share: 68.75% of turnover (typical for the consulting industry)
Example 3: Manufacturing company
Situation: A furniture manufacturer with a complex cost structure:
| Cost category | Detailed Records | Amount (NOK) |
|---|---|---|
| Operating income | Furniture sales | 15,000,000 |
| Repair services | 500,000 | |
| Total operating income | 15,500,000 | |
| Cost of goods | Wood and materials | 6,000,000 |
| Shipping of raw materials | 300,000 | |
| Salary costs | Production wage | 3,500,000 |
| Employer's tax | 490,000 | |
| Depreciation | Production machines | 800,000 |
| Buildings | 200,000 | |
| Other operating costs | Electricity and heating | 400,000 |
| Machine maintenance | 300,000 | |
| Insurances | 150,000 | |
| Total operating costs | 12,140,000 | |
| OPERATING RESULT | 3,360,000 |
Key figures: - Operating margin: 21.7% - Cost of goods sold as a % of turnover: 40.6% - Salary cost as a % of turnover: 25.7%
Analysis of the Operating Accounts
Effective analysis of operating accounts requires both horizontal and vertical analysis techniques.
1. Vertical Analysis (Common Size)
All items are expressed as a percentage of operating revenues:
| Amount | % of Revenue | |
|---|---|---|
| Operating income | 10,000,000 | 100.0% |
| Cost of goods | 6,000,000 | 60.0% |
| Salary cost | 2,000,000 | 20.0% |
| Other operating costs | 1,500,000 | 15.0% |
| Operating profit | 500,000 | 5.0% |
2. Horizontal Analysis (Trend Analysis)
Comparison over several years to identify trends:
| 2021 | 2022 | 2023 | Amendment 22-23 | |
|---|---|---|---|---|
| Operating income | 8,500,000 | 9,200,000 | 10,000,000 | +8.7% |
| Operating costs | 8,100,000 | 8,800,000 | 9,500,000 | +8.0% |
| Operating profit | 400,000 | 400,000 | 500,000 | +25.0% |
| Operating margin | 4.7% | 4.3% | 5.0% | +0.7pp |
3. Key figures for Operational Analysis
Profitability key figures:
- Gross margin = (Operating revenue - Cost of goods sold) ÷ Operating revenue
- EBITDA margin = (Operating profit + Depreciation) ÷ Operating revenue
- Cost ratio = Operating expenses ÷ Operating revenues
Efficiency key figures:
- Revenue per employee = Operating income ÷ Number of employees
- Salary cost per employee = Salary costs ÷ Number of employees
- Productivity index = Revenue per employee ÷ Salary cost per employee
Budget and Forecasts for Operating Accounts
Budgeting the operating accounts is essential for planning and control.
Budgeting process:
1. Sales budget (Starting point)
- Market analysis and forecasts
- Historical data and trends
- Seasonal variations
- New products/services
2. Production/Service Budget
- Capacity assessment
- Resource needs
- Cost of goods budget
3. Cost budget
- Fixed costs: Rent, insurance, basic staffing
- Variable costs: Based on activity level
- Semi-variable costs: Combination of fixed and variable parts
Example of Operating Budget:
| Month | Jan | Feb | Mar | Q1 Total |
|---|---|---|---|---|
| Budgeted Revenue | ||||
| Sales revenue | 800,000 | 850,000 | 900,000 | 2,550,000 |
| Other operating income | 20,000 | 20,000 | 20,000 | 60,000 |
| Total revenue | 820,000 | 870,000 | 920,000 | 2,610,000 |
| Budgeted Costs | ||||
| Cost of goods | 480,000 | 510,000 | 540,000 | 1,530,000 |
| Salary cost | 200,000 | 200,000 | 200,000 | 600,000 |
| Other operating costs | 80,000 | 85,000 | 90,000 | 255,000 |
| Total costs | 760,000 | 795,000 | 830,000 | 2,385,000 |
| Budgeted operating profit | 60,000 | 75,000 | 90,000 | 225,000 |
Deviation analysis:
Comparison of actual figures against budget:
| Budget | Actual | Deviation | Deviation % | |
|---|---|---|---|---|
| Operating income | 2,610,000 | 2,580,000 | -30,000 | -1.1% |
| Operating costs | 2,385,000 | 2,420,000 | +35,000 | +1.5% |
| Operating profit | 225,000 | 160,000 | -65,000 | -28.9% |
Accounting and Documentation
Correct accounting of operating items is essential for reliable financial reports.
Important Accounting Principles:
1. The accrual principle
Revenue is recognized when it is earned , not necessarily when it is received.
Example - Sales on credit:
Debet: Kundefordringer 100 000
Kredit: Salgsinntekt 100 000
2. The principle of comparison
Costs that are directly related to revenue should be recorded in the same period.
Example - Commission on sales:
Debet: Provisjonskostnad 5 000
Kredit: Skyldig provisjon 5 000
Accrual of Operating Items:
Prepaid Costs (Advance):
When paying annual insurance (120,000 NOK):
Debet: Forskudd forsikring 120 000
Kredit: Bank 120 000
Monthly accrual:
Debet: Forsikringskostnad 10 000
Kredit: Forskudd forsikring 10 000
Costs incurred:
Accrued salary at month end:
Debet: Lønnskostnad 250 000
Kredit: Påløpt lønn 250 000
Digitization and Automation
Modern technology has revolutionized how operating accounts are handled and analyzed.
Technological Solutions:
1. ERP systems
- Integrated data flow from sales to accounting
- Real-time reporting of operating results
- Automatic accrual and provisions
2. Artificial Intelligence and Machine Learning
- Automatic categorization of transactions
- Predictive analytics for budget planning
- Deviation detection and notification
3. Cloud-based Solutions
- Accessibility from anywhere
- Scalability to suit your business needs
- Automatic updates and security
Advantages of Digitalization:
| Area | Traditional | Digital |
|---|---|---|
| Data collection | Manual registration | Automatic import |
| Reporting | Monthly/quarterly | Real time |
| Analysis | Static reports | Interactive dashboards |
| Forecasts | Based on history | AI-powered predictions |
| Error risk | High (manual handling) | Low (automation) |
Legal Requirements and Accounting Standards
Norwegian companies must follow specific requirements for accounting and reporting of operating items.
Relevant Regulations:
1. Accounting Act
- Section 6-1: Requirements for income statements
- § 7-1: Accounting for income
- § 7-2: Accounting for costs
2. Accounting Regulations
- Detailed chart of accounts requirements
- Accounting specifications
- Documentation and storage requirements
3. Norwegian Accounting Standards (NRS)
- NRS 2: Fixed assets
- NRS 9: Inventories
- NRS 15A: Accounting for income
Audit and Control Requirements:
Internal control:
- Authorization procedures for expenses
- Reconciliation routines for all accounts
- Periodic review of operating results
External Audit:
- Review of operating items
- Verification of revenue recognition
- Control of cost periodization
Industry-specific features
Different industries have special characteristics in their operating accounts that are important to understand.
Retail:
- High cost of goods sold (60-80% of sales)
- Seasonal variations in sales
- Low operating margin (2-8%)
- Focus on inventory turnover and working capital
Service provision:
- High salary share (50-70% of turnover)
- Low or no cost of goods sold
- Higher operating margin (10-25%)
- Focus on productivity per employee
Production:
- Complex cost structure
- High depreciation on machinery
- Variable costs linked to production volume
- Focus on contribution margin
IT and Technology:
- High development costs
- Low variable costs
- Scalable business models
- Focus on growth and market share
Common Mistakes and Pitfalls
Many companies make typical mistakes in handling operating accounts that can affect the basis for decision-making.
Typical Errors:
1. Incorrect Accrual
- Problem: Costs or income are recorded in the wrong period
- Consequence: Misleading operating results
- Solution: Systematic reconciliation routines
2. Lack of Categorization
- Problem: Mixing of operating and financial records
- Consequence: Unclear operational performance
- Solution: Clear chart of accounts and guidelines
3. Inconsistent Treatment
- Problem: Different treatment of similar transactions
- Consequence: Non-comparable figures
- Solution: Standardized procedures
Best Practices:
- Monthly reconciliation of all operating accounts
- Clear documentation of all transactions
- Regular analysis of deviations and trends
- Training of staff in accounting principles
Future Trends and Developments
Operating accounting will continue to evolve with new technologies and business models.
Upcoming Developments:
1. Real-time reporting
- Continuous update of operating results
- Instant insight into operational performance
- Faster decision-making processes
2. Predictive Analysis
- AI-powered revenue forecasts
- Automatic notification of deviations
- Cost structure optimization
3. Sustainability reporting
- Integration of ESG metrics
- Environmental costs in operating accounts
- Sustainable business models
4. Blockchain and Transparency
- Immutable transaction logs
- Increased confidence in financial reporting
- Automated smart contracts
Conclusion
Operating statements are a fundamental tool for understanding and managing a company's operational performance. By focusing on its core business, they provide management and stakeholders with a clear picture of how profitable day-to-day operations are.
Key Takeaways:
- The operating statement separates operational activities from financial
- Operating profit is the key measure of operational profitability
- Systematic analysis of operating items provides valuable insights
- Correct accounting is essential for reliable reports
- Digitization improves accuracy and accessibility
By mastering operating accounting, companies can make better strategic decisions , optimize their cost structure , and ensure long-term profitability . It is not just an accounting tool, but a critical component of modern business management.
For businesses looking to improve their financial management, a thorough understanding of operating results is essential for success in today's competitive market.