Noncash expenses are expenses that do not result in the transfer of cash from the business's bank account to another party. These expenses must be reported on the balance sheet and are a type of intangible asset that shows up on a business’s income statement.
Learn what noncash expenses are, what noncash expenses might look like with specific examples, and why they matter to small businesses.
Definition and Examples of Noncash Expenses
Noncash expenses are types of business expenses that are not paid in cash and are non-tangible that can include depreciation, amortization, bad debts, advertising costs, and research and development.
Since these assets don’t generate any cash, they can't be used as collateral for loans or conversion into equity. Also, although noncash expenses do not cost a business any money, they still have a monetary value and are therefore very important and should be accurately accounted for.
Examples of things that could incur noncash expenses include:
- Depreciation of assets such as machinery, vehicles, and buildings
- Rent and occupancy costs for leased buildings or office space
- Insurance premiums for things like general liability insurance, workers compensation insurance, fire, and theft coverage on property
- Office equipment
Types of Noncash Expenses
There are four common types of noncash expenses for small businesses to be aware of: depreciation, depletion, amortization, and deferred charges.
Depreciation is an accounting method used to recognize the decline in value of fixed assets (property, plant & equipment) over time. Depreciation is a tax-deductible expense, as long as it meets certain IRS requirements.
Depletion is an accounting method used to recognize the decrease in the value of certain resources over time, such as mineral rights or oil fields.
Amortization is the process used to determine the annual costs for intangible assets and reduce them from balance sheet account balances to reflect a pattern of using them up equally during each year's period.
These charges are costs that will not be incurred until sometime in the future. Common small business deferred charges include prepaid rent
Not all noncash charges will reduce cash and cash equivalents on the cash flow statement. Depreciation, for example, impacts earnings but does not have a direct impact on cash flows.
How Do You Account for Noncash Expenses?
Noncash expenses are usually considered assets in financial statements. As they are essential for business operations, it's important to be able to assign value and identify them from other types of expenses like cash or credit card purchases. This will help with getting an accurate idea of how much money a business has coming in versus what’s going out, which is necessary for a business's financial stability.
Noncash expense reporting is the process of assigning value to in-kind goods and services. It is important for businesses to do this because it helps with understanding the true financial picture of a business. To report noncash expenses on taxes, you need to calculate the total cost of the depreciation, amortization, and depletion of the item from that year. You then take this number and add it to your gross income number on your tax return.
- Noncash expenses are business expenses that do not require the expenditure of cash.
- There are four types of noncash expenses: depreciation, depletion, amortization, and deferred charges.
- Noncash expenses are recorded as expenses on the income statement, but they do not have an effect on cash flow.
- Noncash expenses can include items such as accounting services, bad debts, advertising costs, and research and development.
Frequently Asked Questions (FAQs)
How do you forecast noncash expenses?
Forecasting noncash expenses can be more difficult than cash expenses, but it is necessary for a financial forecast to be complete. Noncash expenses include depreciation, amortization, and other costs that cannot be converted to cash. These types of expenses usually increase over time as the value of assets depreciates or becomes obsolete. The higher the rate of depreciation, the higher the expense will be relative to the asset's value. Compare depreciation methods and determine which one(s) work best for your business.
- Straight-line depreciation
- Sum of the years' digits depreciation
- Accelerated depreciation
- Double declining balance depreciation
Use an amortization calculator to determine what your future loan repayments are going to be.
Why are noncash expenses added back onto the cash flow statement?
Noncash expenses are added to the cash flow statement because they represent money that has been spent in the past but not reflected in the current accounting records. Noncash expenses are generally already accounted for at the time of the original purchase. For example, depreciation of a vehicle as a noncash expense does not mean the business is losing any cash every year. It just means that an asset is losing value or usability over time.
What is noncash revenue?
Noncash revenue refers to revenues generated from sources other than cash. This can be in the form of payments from debtors, cash flows from financial instruments, and proceeds from fixed assets sales. Noncash revenue is often referred to as accrued or “unrealized” revenue by accountants and can be a significant source of income for many businesses because of the increasing popularity of e-commerce transactions and digital sales. It is also a good way to accurately assess true business performance as it excludes nonrecurring events such as one-time sales or loan repayments.