What Is a Non-Operating Expense?
A non-operating expense is a business expense unrelated to core operations. The most common types of non-operating expenses are interest charges and losses on the disposition of assets. Accountants sometimes remove non-operating expenses and non-operating revenues to examine the performance of the core business, excluding the effects of financing and other items.
Non-operating expenses can be contrasted with operating expenses, which relate to the day-to-day functioning of a business.
Key Takeaways
- A non-operating expense is incurred when a cost doesn't directly relate to a firm's primary or core business.
- Non-operating expenses are deducted from operating profits and accounted for at the bottom of a company's income statement.
- Examples of non-operating expenses include interest payments, write-downs, or costs from currency exchanges.
Understanding Non-Operating Expense
Non-operating expense, like its name implies, is an accounting term used to describe expenses that occur outside of a company's day-to-day activities. These types of expenses include monthly charges like interest payments on debt and can also include one-time or unusual costs. For example, a company may categorize any costs incurred from restructuring, reorganizing, costs from currency exchange, or charges on obsolete inventory as non-operating expenses.
Non-operating expenses are recorded at the bottom of a company's income statement. The purpose is to allow financial statement users to assess the direct business activities that appear at the top of the income statement alone. Generating profit from core operations is critical for a company.
Special Considerations
When looking at a company's income statement from top to bottom, operating expenses are the first costs displayed below revenue. The company starts the preparation of its income statement with top-line revenue. Cost of goods sold (COGS) is subtracted from revenue to arrive at gross income.
After gross income is calculated, operating costs are subtracted to get the company's operating profit, or earnings before interest and tax (EBIT). After operating profit has been derived, non-operating expenses are subtracted from operating profit to arrive at earnings before taxes (EBT). Taxes are then calculated to derive net income.
Non-Operating Expense Examples
Most public companies finance their growth with a combination of debt and equity. Regardless of the allocation, any business that has corporate debt also has monthly interest payments. This is considered a non-operating expense because it's not commonly thought of as core operations.
If a company sells a building, and it's not in the business of buying and selling real estate, the sale of the building is a non-operating activity. If the building were sold at a loss, the loss is considered a non-operating expense.
Frequently Asked Questions
Why do companies separate out non-operating expenses?
When looking at how a company generates profits, understanding its profits from core operations, net of direct operating expenses, is critical. Costs unrelated to these operations impact the bottom line, but they may not indicate how well a company is running.
What are examples of non-operating expenses?
Interest payments, the costs of disposing of property or assets not related to operations, restructuring costs, inventory write-downs, lawsuits, and other one-time charges are common examples.
Are rent and utilities non-operating expenses?
Typically, no. These would both be directly related to a business' core operations, since without paying rent and utilities, the firm wouldn't be able to function.
FAQs
A non-operating expense is a cost from activities that aren't directly related to core, day-to-day company operations. Examples of non-operating expenses include interest payments and one-time expenses related to the disposal of assets or inventory write-downs.
What is an example of a non-operating income? ›
Investment income, gains or losses from foreign exchange, as well as sales of assets, writedown of assets, interest income are all examples of non-operating income items. Some of the non-operating income items are recurring, for example, dividend income, and interest income.
Which of the following items is not an operating expense? ›
The correct answer is c.
The salaries expense, rent expense, and advertising expense are all considered to be part of the operating expenses. The interest expense is a non-operating expense, which means it is not involved in generating operating income. Interest expense represents the cost charged on loans.
What are non-operating expenses and indirect expenses? ›
Indirect expenses are expenses related to production, purchase, and sale. Non-operating expenses are expenses unrelated to business activities. Indirect expenses count as operating expenses.
Is rent a non-operating expense? ›
Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development. By contrast, a non-operating expense is an expense incurred by a business that is unrelated to the business's core operations.
What are non-operating items? ›
Non-operating components on the income statement include revenue and expense items that were not generated during the regular course of business operations. Due to the material nature of non-operating items, they are always reported exclusively i.e. separate from operating items in a company's financial statements.
What is an example of a non-operating business? ›
Examples of non-operating activities include: Relocating the business. Expenses caused by weather damage. Acquiring another firm.
Is income tax a non-operating expense? ›
Yes, some taxes are considered operating expenses, such as property taxes, employee payroll taxes, and any other taxes related to operational activities. While other types of taxes, such as taxes on income are considered a non-operating expense.
What is an example of operating and non-operating revenue? ›
For example, the revenue generated from the total sale of iPhones worldwide is an operating revenue for Apple, whereas the revenue generated from sale of old office furniture would be a non-operating revenue.
Is bad debt a non-operating expense? ›
Bad debts are an operating expense.
Operating expenses definition
They include rent and utilities, marketing and advertising, sales and accounting, management and administrative salaries.
Which is not considered an expense? ›
Payments to Yourself.
You most likely just withdraw money from your business on a semi-regular basis or even just when you need it. These withdrawals are not considered expenses as they are not paying for something related to the business, but instead are a reduction in your Equity in the business.
What is a non-operating expense income? ›
Key Takeaways. Non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
Is non-operating expense a direct expense? ›
A non-operating expense is a type of expense incurred by a business or organization which is not directly related to its primary operations or core business activities.
What is a non-operating expense on a cash flow statement? ›
Non-Operating Expenses in Cash Flow Statement
Some common examples include: Interest expense on debt. Losses from asset sales or write-downs. Foreign currency exchange losses.
What are non-operating items reported on the income statement? ›
Key Takeaways
Non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
What are non-operating items in cash flow? ›
Examples of non-operating cash flow can include taking out a loan, issuing new stock, and a self-tender defense, among many others. Items listed under non-operating cash flow are usually non-recurring.
