Question

Why are accounts listed on a company’s chart of accounts typically identified both by a number and a descriptive name? Why is interest income not considered part of operating revenues, and why is interest expense not considered part of operating expenses?

Answer 1

1.

The chart of accounts refers to the index of all the accounts in the books of the company. It is a list of all the accounts. The list of accounts is used by the stakeholders to make decisions. The accounts in charts of accounts are presented with a specific identification code (number) along with its respective name. It is done for the convenience of the user of the chart of accounts. The identification code helps in locating an account easily as there are many accounts.

The numbers are provided to the accounts in a systematic manner. For example: all the accounts have 5 digits. If the first digit is “1” it means asset, second digit is “2”, it means current assets. Therefore, the account with the initials of “12” will be current assets.

2.
The interest income is not treated as operating revenue because it is not generated from the core business activities of the company. It is generated from the non-operating sources.

For example: If a company deals in shoe business, then the operating revenue will consist of proceeds from the sale of shoes. Therefore, the interest revenue from the investment will be a non-operating income.

The interest expense is not considered as an operating expense because it does not arise from the core business of the company. The interest expense is a non-operating expense because it does not result from the core business activities of the company.

For example: If a company deals in shoes, then the operating expenses would include all the expenses incurred in the manufacturing of the shoes. Thus, the interest payment is not incurred directly in the production of the shoe. Therefore, it is not considered as an operating expense.

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