Non-cash expenses are the expenditures incurred without involving cash payments. However, business owners should still record these transactions in the company’s profit and loss statement in the accounting period those costs were incurred. If you are not familiar with the accounting treatments that are related to non-cash expenses, feel free to contact an accounting firm in Singapore, and the experts are always ready to help.
Although business owners do not need to pay cash (Also see Types of Cash Flow Activities – Cash Flow from Financing Activities) for those expenses, they should still record these transactions in their books of accounts. This is because according to the accrual basis of accounting (Also see Basics of Cost Accounting ) , one should record the transactions once they happen. Thus, even though the non-cash expenses do not involve the payment of cash, we still need to record them.
Depreciation is probably the most common type of non-cash expenses a company may incur. When business owners purchase assets for their companies, they need to reduce the value of those assets as they are subject to wear and tear, and they will become obsolete as time passes. They need to record the reduction in value as an expense in the profit and loss statement every year. This is a non-cash expense, and people would call it depreciation.
The concept of amortisation is the same as that of the depreciation. The only difference is that depreciation is for tangible assets, whereas amortisation is for intangible assets. When the company incurs an amortisation expense, it means that the company has written off an intangible asset over its expected useful life. This is also a non-cash expense as the company does not need to pay cash for it.
Apart from depreciation and amortisation, the unrealised gains and losses are also non-cash transactions. In the case of unrealised gains, the investors feel that the investment will bring them a profit. However, in fact, they did not earn any profit in cash, but this is just on the paper. Thus, this is a non-cash transaction. The same concept applies to unrealised losses, and in this case, the investors think that the possibility of suffering from future loss is higher. As this only happens on the paper and it does not involve cash payment, this is a non-cash expense.
Some companies may create provisions for losses that they think may happen in the future. This is because if the company chooses to sell some of its products or services on credit, there will be a possibility where they will not be able to collect the full amount in cash in the future. There may be cases where the customers do not pay at all. The amount of money that the company would not be able to collect is called bad debt. To protect their own interests, companies may create provisions for bad debt (also known as the allowance for doubtful accounts) before the bad debt happens. Such expenses also fall under the category of non-cash expenses as the company does not pay out cash too.
In a nutshell, keeping records of non-cash expenses in the profit and loss statement is necessary as this allows us to determine the net income (Also see How Do Net Income and Gross Income Differ from Each Other) of the business. One thing to note is that business owners should add back the non-cash expenses when they calculate the company’s free cash flow (Also see How to Prepare a Cash Flow Statement by Using the Direct and Indirect Methods?) to obtain the exact cash inflow and outflow.