Normal Operating Activities
Normal operating activities are the typical, day-to-day functions of a business that contribute to its core operations and are responsible for generating most of the company’s revenue. These activities vary depending on the nature of the business but usually include things like manufacturing products, selling goods or services, paying for direct costs like materials and labor, and incurring other expenses related to these functions.
For example, a manufacturing company’s normal operating activities would include buying raw materials, producing goods, selling the manufactured products, and managing inventory. For a service company, normal operating activities could involve providing the services it specializes in, like consulting, cleaning, or repair services.
In financial accounting, the revenue, cost of goods sold, and expenses associated with these activities are typically reported in the “Operating Income” section of the income statement. This is often considered one of the most important parts of the income statement, as it reflects the profit or loss from a company’s core business operations.
Example of Normal Operating Activities
Let’s consider two different types of companies, a tech company (for example, a software development firm) and a retail company, to illustrate what might be considered normal operating activities for each.
- Tech Company (Software Development Firm):
- Development and Programming: The actual design and coding of software products or services. This might involve brainstorming, designing, coding, testing, debugging, and finalizing software.
- Sales and Marketing: This includes selling the software products or services. It may involve activities like marketing campaigns, customer relationship management, sales meetings, and contract negotiations.
- Customer Support: Providing help and technical support to customers who have bought and are using the company’s software. This could involve responding to inquiries, solving technical issues, and providing regular updates or patches to the software.
- Retail Company:
- Purchasing: Buying products from suppliers to stock in the store. This involves researching suppliers, negotiating prices, and arranging for the transport of goods.
- Inventory Management: Receiving, storing, and managing the products that the store sells. This could include activities like labeling, shelving, restocking, and taking inventory.
- Sales: Selling the products to customers. This involves not only the actual sales transactions, but also arranging merchandise displays, helping customers find products, and handling returns or exchanges.
- Marketing: Promoting the store and its products to attract customers. This might involve advertising, creating sales or special offers, and managing a social media presence.
These activities are considered “normal operating activities” for these types of businesses because they are directly tied to the core operations of the company – they are the main activities the companies undertake to earn revenue.