What Are Non-Operating Expenses? (With Types And Examples)
Updated 13 August 2023
Apart from incurring expenses associated with day-to-day business operations, a company might incur other expenses, such as non-operating expenses. An accountant does not include these expenses in the operating income because they do not relate to the company's core business operations. Learning about non-operating costs and their relevance can help you understand a company's performance. In this article, we explain what non-operating costs are, discuss why it is important to understand them, review their importance, highlight the types and disadvantages, explore FAQs and read two examples.
Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.
What Are Non-Operating Expenses?
Non-operating expenses are the expenses that a company incurs for activities that do not relate to its core operations. These expenses appear on the company's income statement below the operating expenses. Some common non-operating costs are interest fees, product write-offs, restructuring costs and disposition of asset costs. While calculating a company's revenue, accountants can exclude these expenses because it does not affect the performance. Recording and analysing these expenses can help a company determine how it is performing and how it might perform in the future.
Operating expenses give an overview of companies' daily functioning. These are the expenses that directly relate to the cost of operating a business. Operating expenses include employee salaries, office supplies, marketing and advertising costs and rental costs. Typically, the operating expenses focus on activities that support revenue generation, whereas the non-operating costs do not help in revenue generation.
Why Is It Important To Understand The Non-Operating Costs?
It is important to understand non-operating costs because they accurately assess what the company spends or earns. As the non-operating costs are not everyday expenses, companies might track them separately. This helps provide a clear overview of how the business performed in the past and how it might perform in the future. In addition, this expense can sometimes affect the overall performance of a company.
Importance Of Non-Operating Costs
Non-operating costs offer a company many benefits, such as:
Helps in establishing trust with existing and potential leaders because it offers transparent transactions
Provides detail about the non-operating costs like loan interest and employee benefits
Allows accountants to prepare a more accurate and transparent financial report like the income statement
Helps in analysing the company's performance and estimating the potential earnings
Helps managers keep track of unessential and unwarranted expenses
Types Of Non-Operating Expenses
Here are different non-operating costs a company might incur:
When a company takes a loan to support its growth, it is likely to make interest payments until it pays back the loan in full. The loan repayment can be short or long-term, depending on the loan terms. Interest is a non-operating cost, as it does not consider the cost of running a business operation and does not affect the company's revenue generation.
A company might invest in other companies or financial opportunities. Companies invest in these companies to grow their assets and hope their value increases. When these investments are non-profitable, the company loses all the invested funds. Typically, accountants record these expenses as non-operating costs.
When a company restructures its operations, it might incur some costs. These costs include printing new leaflets for companies, paying additional bonuses and restructuring costs. Though restructuring helps ensure efficient company operations, it might result in non-operating costs, as this is outside the company's normal operations.
The cost of legal settlements might be costly for a company. Though most legal fees are part of a company's normal operating expense, it might often incur legal fees for unforeseen circumstances. Often, these legal expenses can be non-operating costs.
Changes in accounting principles
When a company changes its method of accounting, it can result in a change in the monetary records. This might change the recorded value of assets and liabilities. When these changes result in losses, they get recorded as non-operating costs.
Changes in the foreign exchange rate
Many companies that operate and sell products and services in the international market might face foreign exchange rate loss and gain. Typically, when a company receives payment in a foreign currency and the exchange rate decreases in value, it might result in a loss for the company. This is another non-operating cost because it does not contribute to the company's core operations.
An inventory write-down shows when an inventory loses its value and the market value decreases below its book value. A company might write off the inventory when the products or goods expire, get stolen by someone or get damaged because of inadequate storage and handling. Such assets are not worth selling and a company may list them under non-operating cost.
Disadvantages Of Non-Operating Costs
Here are a few disadvantages of non-operating costs:
Might create confusion. Some expenses might create confusion for the accountant because it might be challenging to determine whether the expense is operating or non-operating. This requires an accountant to have in-depth knowledge of the various expenses.
Require time and effort to understand. Often, an expense can be an operating cost for one company, whereas the same expense can be non-operating for another company. An accountant who separates the two expenses requires time and effort to understand the company's expenses.
Frequently Asked Questions About These Expenses
Here are some frequently asked questions about non-operating expenses:
Why is it essential to separate non-operating and operating expenses?
When an accountant uses the non-operating cost, such as interest payments and inventory write-down in calculating the operating income, it might understate the company's financial performance. For example, when a company subtracts a loan interest payment of ₹10,000, the earnings before interest, tax, depreciation and amortisation (EBITDA) decrease by ₹10,000. This might cause inaccuracy in financial forecasting. Alternatively, when the company includes a onetime gain, it might overstate the financial performance of the company. This might provide inaccurate valuation multiples.
What types of companies have non-operating costs?
Most companies have some non-operating costs. Larger companies might have expenses like investment losses, inventory write-down and restructuring costs. Alternatively, small companies might incur non-operating costs like interest payments and depreciating assets.
Why do accountants consider unexpected disasters as non-operating costs?
Every company might be susceptible to unexpected disasters, like earthquakes, hurricanes, tsunamis and floods. This can cause damage to the company's resources and property. As these events occur unexpectedly, the repair cost a company spends is the non-operating cost. The repair cost does not directly relate to the company's core operations.
How are capital expenses different from non-operating costs?
In accounting, capital expenses are the cost a company incurs to acquire, maintain and upgrade physical assets, such as plants, buildings and property. An accountant lists these expenses on the balance sheet. Alternatively, a non-operating cost is a cost that does not occur because of a company's core operations. An accountant lists these costs in the company's income statement.
Examples Of Non-Operating Costs
Here are a few examples of non-operating costs that can help you understand this cost:
Example for a chemical company
Here is an example of a non-operating cost:
Reyansh Chemicals provide electrical services to customers. During the entire year, the company sells machinery at a ₹40,000 loss. Typically, this loss is a non-operating cost because it does not arise because of a company's core operations. In the same period, the company pays the insurance premium for the entire year at the start of the year. This payment is a non-operating cost. Typically, the accountant lists these costs under the non-operating income header in the income statement.
Example for a manufacturing company
Here is another example of non-operating costs:
Supreme Manufacturing focuses on the international market for buying raw materials and selling finished products. As the company conducts transactions in foreign currency, it is likely to face currency exchange loss when the exchange rate decreases. When large exchange rate fluctuations occur, it might result in a company losing more money. The losses occurring because of the exchange rate fluctuation are a non-operating cost.
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