What are non-cash expenses?

Definition

Non-cash expenses are period costs that lower leftover profit even though no cash left the bank. On the books, they are Income Statement costs whose matching credit is not the bank.

A print shop with a financed press sees this most often as depreciation expense. Profit drops; cash in the till does not.

The charge is real for leftover profit. It is not a check the shop writes this month.

Accrual books record the charge in the period of use. Cash never leaves for that particular line.

Where it shows up

P&L: Located in expenses, usually depreciation or amortization.

Balance Sheet: Related to accumulated depreciation or the asset written down.

Cash flow: Added back in the operating section, so reported cash from operating activities is higher than net income.

See also: Depreciation Expense · Indirect Method · Cash Flow From Operations

When you look at your Income Statement, these charges sit in expenses. Depreciation on the press and amortization expense on a software license are the usual pair.

When the figure is large, the shop has a lot of fixed assets being spread, or it took a write-down. When it is small, the press is old and fully spread, or the shop is light on depreciable equipment.

The Balance Sheet holds accumulated depreciation against the press. A write-down lowers the asset itself.

On the Statement of Cash Flows, the operating section adds these charges back. Reported cash from operating activities is then higher than leftover profit by that amount.

Bad debt expense can also be non-cash in the period it is estimated. No check leaves; a receivable is judged uncollectible.

Asset impairment and an inventory write-down work the same way. Profit falls; cash does not leave that day.

How it works

The shop uses a press that will last years. Each month a slice of that cost is charged as depreciation.

The debit hits the Income Statement. The credit hits accumulated depreciation, not cash.

Profit is lower by that slice. The bank balance does not move for this entry.

The same idea applies to a license sitting in intangible assets. Amortization is the charge; cash already left when the license was bought.

Stay with the charge that did not move cash. Paying the press loan is a different cash event.

Do not treat the add-back on the cash-flow statement as money received. It only undoes the non-cash charge so operating cash is not understated.

After the month closes, this charge is part of the period's leftover. Next month records the next slice.

Useful life sets how long the press is spread. A longer life makes each month's charge smaller.

The original press purchase was cash or financing when it happened. This month's depreciation is only the spread, not a second purchase.

Example

Ink & Plate Print Shop records this month's depreciation on a financed press. The monthly slice is $700.

The entry is:

Debit: Depreciation expense $700

Credit: Accumulated depreciation $700

Profit dropped $700 and cash did not. The Balance Sheet shows $700 more accumulated depreciation against the press.

Job revenue this month is $18,000. The $700 still sits in expenses even though no check left for it.

If the shop also wrote off $300 of an old design-software license, that amortization is another non-cash charge. Leftover profit would then be $1,000 lower than cash from that pair.

A later cash principal payment on the press loan is not this charge. That payment is cash out; this $700 is not.

Common mix-ups

Non-cash expenses are not the same as unpaid bills. An unpaid vendor bill will still take cash later; depreciation never will.

Non-cash expenses are not the same as cash from operations. Cash from operations starts at leftover profit and adds these charges back, along with working-capital moves.

Non-cash expenses are not the same as earnings before interest, taxes, depreciation, and amortization. That figure adds depreciation and amortization back to operating leftover; this page is about the charges themselves.

Related terms

• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Amortization Expense: The periodic charge that writes off an intangible asset over its life.
• Bad Debt Expense: The expense recorded when receivables are judged uncollectible.
• Indirect Method: Building operating cash flow by starting at net income and adjusting for non-cash and working-capital items.
• Cash Flow From Operations: Cash generated or used by the day-to-day running of the business.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization.
• Asset Impairment: Writing an asset down when its carrying value exceeds what it can actually earn.
• Inventory Write-Down: Reducing the carrying value of inventory that is damaged, slow, or worth less than cost.