What is a Non-Cash Charge?
Anon-cash chargeis a write-down or accounting expensethat does not involvea cash payment. They can represent meaningful changes to a company's financial standing, weighing on earnings without affecting short-term capital in any way. Depreciation, amortization, depletion, stock-based compensation, and assetimpairmentsare common non-cash charges that reduce earnings but not cash flows.
Key Takeaways
- Anon-cash chargeis a write-down or accounting expensethat does not involvea cash payment.
- Depreciation, amortization, depletion, stock-based compensation, and assetimpairmentsare common non-cash charges that reduce earnings but not cash flows.
- Non-cash charges are necessary for firms that use accrual basis accounting.
Understanding a Non-Cash Charge
Non-cash charges can be found in a company’s income statement. Charges unaccompanied by a cash outflow must be recorded and are necessary for firms that use accrual basis accounting, a system used by companies to record their financial transactions, irrespective of whether a cash transfer has been made.
Accrual Accounting
Depreciation,amortization, anddepletionare expensed throughout the useful life of an asset that was paid for in cash at an earlier date. If a company's profitdid not fully reflect the cash outlay for the asset at that time, it must be reflected over a set number of subsequent periods. These charges are made against accounts on thebalance sheet, reducing the value of items in that statement.
- Depreciation:When a company buys new equipment, a percentage of the purchase price is deducted over the course of the asset's useful life to factor in things like wear and tear. That expense is recorded every year in the income statement as a non-cash charge.
- Amortization: Amortization is very similar to depreciation, but applies to intangible assets such as patents, trademarks and licenses rather than physical property and equipment. If a company spends $100,000 on a patent that lasts for a decade, it records an amortization expense of $10,000 each year.
- Depletion: Depletion is a technique used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth. Unlikedepreciationand amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.
Non-Recurring Charges
Non-cash charges can also reflect one-time accounting losses that are driven by changing balance sheet items. Such charges are often the result of changes to accounting policy, corporate restructuring, the changingmarket valueof assets or updated assumptions on realizable future cash flows.
General Electric Co.’s (GE) $22 billion write-down of the value of its struggling power business in October 2018, referred to as a goodwill impairment charge, is a great example of a non-recurring non-cash charge. Goodwill is added to the balance sheet when anacquisitionexceeds the fair value of the acquired entity, and it must be impaired in the future if the value of the acquired assets falls below original expectations. GE’s big accounting charge, mainly linked to its $10.6 billion acquisition of France-based Alstom, understandably raised eyebrows.
Special Considerations
Non-cash charges, like other types of write-downs, reduce reported earnings and, as a result, can weigh on share prices. Companies often seek to play down the significance of non-cash charges, particularly one-off ones, adjusting earnings to exclude their impact from financial figures.
Investors are tasked with determining whether non-cash charges are a cause for alarm. Non-cash expenses are often pre-flagged and harmless. However, some may appear out the blue and serve as potential red flags of poor accounting, mismanagement and a drastic shift in fortunes.
FAQs
Key Takeaways
What is an example of a non-cash transaction? ›
Acquiring property, plant or equipment by assuming directly related liabilities, such as a mortgage or loan. The net unrealized increase or decrease in fair market value of investments. Obtaining an asset by entering into a capital lease. Acquiring property by exchanging another piece of property.
What are examples of non-cash items in financial statements? ›
Some common noncash transactions include:
- Depreciation.
- Amortization.
- Unrealized gain.
- Unrealized loss.
- Impairment expenses.
- Stock-based compensation.
- Provision for discount expenses.
- Deferred income taxes.
In general, non-cash payment instruments can be divided into three categories: paper-based, card-based, and electronic-based. All three are the realization of payment system evolution driven by technological innovations and business models, community traditions, and current policies.
How do you record non-cash expenses? ›
Non-cash transactions are always recorded in the income statement, as they directly impact total net income, but do not impact cash flow. Next, you'll need to create a contra account for your equipment to keep track of your monthly depreciation expense.
What are some examples of non-cash charges on an income statement? ›
Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings but not cash flows.
How do you identify non-cash transactions? ›
One way to identify non-cash transactions is to compare the changes in the balance sheet items with the cash flow statement. If there is a difference between the change in an asset or liability and the cash flow related to it, it may indicate a non-cash transaction.
What are the major non-cash items? ›
List of the Most Common Non-Cash Expenses
- Depreciation.
- Amortization.
- Stock-based compensation.
- Unrealized gains.
- Unrealized losses.
- Deferred income taxes.
- Goodwill impairments.
- Asset write-downs.
cash sales is not a non-cash item.
What non-cash items are not recorded in account? ›
1 Answer. Non-Cash items are not recorded in Receipts and Payments Account. Explanation: Receipts and Payments Account is a summary of cash and bank transactions over a certain period.
A business may charge a "non-cash adjustment" or "service fee" at checkout for non-cash paying customers. But regardless of what the business calls it, this is a surcharge. It's adding a charge at the point of sale beyond the posted price.
Is interest expense a non-cash expense? ›
Cash expenses are those that require an outflow of cash from the business in order for them to be incurred. Examples of cash expenses include salaries, interest on loans, and taxes. Non-cash expenses are those that do not require an outflow of money in order to be incurred.
Which of the following is always a non-cash expense? ›
In this question, option C depreciation is correct. Depreciation is the fall in the value of asset due to wear and tear. It is not shown in cash terms.
What are the non-cash activities? ›
These non-cash activities may include depreciation and amortization, as well as obsolescence. Property, plant and equipment resides on the balance sheet. These items are taken on the income statement in small increments called depreciation or amortization.
What is cash and non-cash transactions? ›
A non-cash charge is an accounting expense that does not involve any cash outflow. Unlike a transactional expense that uses cash, a non-cash charge is only considered as an accounting expense on the income statement. Non-cash charges can include expenses such as depreciation, amortization, and depletion.
Which of the following is a non-cash activity? ›
Examples of non-cash activities include: issuance of common shares for dividend purposes, or conversion of convertible bonds or convertible preferred shares; and. exchange of one non-monetary asset for another non-monetary asset.
What are the non-cash transactions in the world? ›
In 2017, Capgemini found that around 548 billion transactions every year were cashless – with Europe's use for card and digital wallets leading the way at 166 billion transactions. In the six years since, however, Capgemini estimates this has ballooned to 1.3 trillion transactions.
