What is Accumulated Other Comprehensive Income (AOCI)?
Accumulated Other Comprehensive Income (AOCI) is a general ledger account that is listed in the equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income category. Any transaction – whether it is a loss (deduction) or a profit (credit) – is deemed “unrealized” when it has not been completed.
For example: If a company makes investments in the stock market, the open profits or losses on the investments are properly listed in the other comprehensive income section of the balance sheet until the stocks are sold, at which time the profits/losses are realized.
Breaking Down an AOCI Account
Several types of profits or losses are eligible to be listed in an Accumulated Other Comprehensive Income account. They include profits or losses related to foreign currency transactions, unrealized profits or losses that are yet to reach maturity, and cost related to operating a pension plan.
After a profit or loss is realized, it is moved from the AOCI account into the net income section of the company’s balance sheet.
The use of AOCI accounts is mandatory, except in the case of privately-held companies and non-profit organizations. As long as financial statements don’t need to be submitted to outside parties, a company is not required to use AOCI accounts.
Regulations Surrounding AOCI Accounts
The Financial Accounting Standards Board (FASB) issued a new standard in 1997, requiring a comprehensive accounting of all income, including “other” or special types of income, specifically the profits and losses that are, in the present, not finalized. The ruling made AOCI accounts mandatory for all publicly-traded companies in the US.
Reporting Accumulated Other Comprehensive Income accounts thoroughly and accurately on a balance sheet is important because the gains and losses affect the balance sheet as a whole and the comprehensive income of a business. The items, however, do not affect net income, retained earnings, or the income statement in terms of actual, finalized income until the transactions are completed and are moved to a different section of the balance sheet.
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