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Business Financials – How to understand what “non-cash expenses” means and what types of non-cash transaction examples there are

images/Business Financials2.jpgI received a call and was asked – what does “Non-cash Expense” mean, and what types of non-cash transaction examples are there?

Answer - These are expenses that show on the Profit & Loss / Income Statement of the current period, but ACTUAL payment during the period has NOT actually occurred. That is, you don’t actually pay them!

One example of a non-cash expense transaction is depreciation. For example, if a company purchased equipment for $5,000 cash/credit, then depending on the allowed rate by the ATO, it could have a depreciation rate of 20% per year, which means an expense of $1,000 in each of the next 5 years. Since there is no cash payment of the depreciation write-off in any of those years, each year’s $1,000 of depreciation expense is known as a non-cash expense.

Another example in a large company is amortization of bond issue costs. Perhaps a company incurred costs of $250,000 for professional fees and registration fees in order to issue $10 million in bonds. If the bonds will mature in 10 years, the corporation will defer the $250,000 of bond issue costs to the balance sheet and  then amortize the cost (send part of the cost to expense) at a rate of $25,000 per year (one tenth). In each year of the bonds’ life, the corporation’s Profit & Loss will report $25,000 of bond issue costs expense which will be a non-cash expense.

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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