Non-operating expenses are expenses that are NOT directly related to the main business operations of a company.
They are expenses incurred in activities that are NOT part of the company's core business.
Non-operating expenses are not included in the cost of goods sold (COGS) or operating expenses.
WHY REPORTING THEM SEPARATELY?
Reporting non-operating expenses separately is important because it allows stakeholders to better understand a company's financial performance and operating results.
By separating non-operating expenses from operating expenses, it provides a clearer picture of the expenses that are necessary for the company's day-to-day operations versus expenses that are not.
Furthermore, non-operating expenses can have a significant impact on a company's overall profitability and financial health: by reporting them separately, stakeholders can more easily identify trends and assess the impact that these expenses have on the company's bottom line.
In addition, some non-operating expenses may be one-time events, such as a loss on the disposal of assets or a natural disaster loss: separating these expenses allows stakeholders to distinguish between recurring expenses and one-time events.
REPORTING THEM IN THE INCOME STATEMENT
The structure to follow for reporting operating expenses among all the items of an income statement is like this:
Revenue
(Cost of Goods Sold)
= Gross Profit
(Operating Expenses)
= Operating Income
(Non-Operating Expenses)
= Net Income
In the following example, the non-operating expenses (interest expense, natural disaster losses and litigation expenses) are reported separately from the operating expenses and are shown below the operating income section: they are then subtracted from the operating income to arrive at the net income.
TYPOLOGIES OF NON-OPERATING EXPENSES
Let's see a primary distinction of them, before jumping into specific examples:
• COMMON NON-OPERATING EXPENSES 💸
These are recurring expenses that are not directly related to a company's primary business operations, such as interest expenses and taxes.
• UNA TANTUM EXPENSES 💰
These are one-time or infrequent expenses that do not relate to a company's ongoing business activities, such as losses on the disposal of assets.
• DISASTER LOSSES 🌪️
These are losses that occur due to catastrophic events such as natural disasters, fires, or accidents.
• RESTRUCTURING EXPENSES 🔧
These are expenses incurred due to restructuring or reorganization efforts, such as severance pay or consulting fees.
• FOREIGN EXCHANGE LOSSES 💱
These are losses incurred due to fluctuations in foreign exchange rates.
• IMPAIRMENT LOSSES 💸
These are losses incurred when an asset's value declines significantly and it is deemed impaired.
• WRITE-OFFS 🔻
These are expenses incurred when an asset or investment is deemed worthless and is removed from the company's books.
• OTHER NON-OPERATING EXPENSES ❓
These are miscellaneous expenses that do not fit into any of the above categories.
EXAMPLES AND REPORTING METHODS
Let's see some examples with the relative journal entries to be made in order to record them (when there is cash account involved, it assumes that they're paid as they're incurred):
• 💰 INTEREST EXPENSES
Interest expenses are costs associated with borrowing money.
When a company takes out a loan or issues bonds, it is required to pay interest on the principal. These expenses are recorded in the income statement and are deducted from revenues to calculate net income... but they come after operating profit/EBIT, so they're not operating expenses!
Example Journal Entry
To record the interest expense on a loan for the year, which cost $10,000:
Debit: Interest Expense $10,000
Credit: Cash $10,000
• 🚕🚚 MOVING EXPENSES
Moving expenses are costs incurred in connection with relocating the company or its employees, such as moving trucks, storage, and travel expenses.
Example Journal Entry
To record moving expenses for an office relocation, which cost $5,000:
Debit: Moving Expenses $5,000
Credit: Cash $5,000
• 📉 INVESTMENT LOSSES
Investment losses are losses incurred as a result of declines in the value of investments, such as stocks, bonds, or mutual funds.
Example Journal Entry
To record a loss on the sale of an investment, which cost $3,000 and was sold for $2,500:
Debit: Investment Losses $500
Debit: Cash $2,500
Credit: Investment $3,000
• 🌧️ NATURAL DISASTER LOSSES
Natural disaster losses are expenses incurred as a result of a catastrophic event such as a hurricane, flood, or earthquake.
These losses can include property damage, loss of inventory, and business interruption.
Example Journal Entry
To record a partial loss of a retail inventory (for a value of $20,000) due to a hurricane:
Debit: Natural Disaster Losses $20,000
Credit: Inventory $20,000
• 🏠 PROPERTY TAXES
Property taxes are annual fees assessed by local governments on real estate properties.
These taxes are typically based on the assessed value of the property and are used to fund local services and infrastructure.
These as well come after operating profit/EBIT, so they're not operating expenses.
Example Journal Entry
To record property taxes on a real estate investment property for the year, which cost $5,000:
Debit: Property Tax Expense $5,000
Credit: Cash $5,000
• 📉 LOSSES ON SALE
Losses on sale occur when a company sells an asset for less than its carrying value.
This can happen with non-operating assets such as investment properties, equipment, or vehicles. These losses are recorded in the income statement and can reduce net income.
Example Journal Entry
To record a loss on the sale of an investment property, which was sold for $200,000 but had a carrying value of $250,000:
Debit: Cash $200,000
Debit: Loss on Sale of Investment Property $50,000
Credit: Real Estate Investment Property $250,000
• 🕵️♂️ LEGAL FEES
Legal fees are costs associated with hiring lawyers or other legal professionals to provide legal advice or representation.
These expenses can arise from non-operating matters such as lawsuits or intellectual property protection.
Example Journal Entry
To record legal fees associated with a lawsuit, which cost $7,500:
Debit: Legal Fees Expense $7,500
Credit: Cash $7,500
• 🧑💼 PROFESSIONAL FEES
Professional fees are costs associated with hiring professionals to provide services such as accounting, consulting, or marketing.
These expenses can arise from non-operating matters such as tax planning, business strategy, or market research.
Example Journal Entry
To record consulting fees associated with a marketing campaign, which cost $3,000:
Debit: Consulting Fees Expense $3,000
Credit: Cash $3,000
• 🖼️ DEPRECIATION/AMORTIZATION (OF NON-OPERATING ASSETS)
Depreciation (for tangible assets) and Amortization (for intangible assets) are an accounting method used to allocate the cost of an asset over its useful life.
This is a non-cash expense that reduces the carrying value of an asset on the balance sheet. Depreciation and Amortization can occur with non-operating assets such as artwork, patents, or licenses utilized for an activity that is not the core business.
Example Journal Entry
To record depreciation on an art collection over the course of the year, which is calculated to be $2,000:
Debit: Depreciation Expense $2,000
Credit: Art Collection Accumulated Depreciation $2,000
• 🏠 INSURANCE PREMIUMS
Insurance premiums are costs associated with purchasing insurance policies to protect non-operating assets such as jewelry, art collections, or luxury vehicles.
These premiums can be paid annually or monthly.
Example Journal Entry
To record insurance expenses on a jewelry collection for the year, which cost $3,000:
Debit: Jewelry Insurance Expense $3,000
Credit: Cash $3,000
• 🌐 FOREIGN EXCHANGE LOSSES
Foreign exchange losses are losses incurred due to fluctuations in foreign currency exchange rates.
Example Journal Entry
To record foreign exchange losses for the quarter, which cost $3,000:
Debit: Foreign Exchange Losses $3,000
Credit: Cash $3,000
• 🌍 CHARITABLE CONTRIBUTIONS
Charitable contributions are donations made by a business to nonprofit organizations or charitable causes.
These contributions are recorded as non-operating expenses and are deductible from taxable income.
Example Journal Entry
To record a charitable contribution to a nonprofit organization, which cost $5,000:
Debit: Charitable Contributions Expense $5,000
Credit: Cash $5,000
• 🌳 ENVIRONMENTAL EXPENSES
Environmental expenses are costs associated with environmental remediation efforts, such as pollution cleanup and disposal of hazardous materials.
Example Journal Entry:
To record environmental expenses for the year, which cost $20,000 (assuming they're not paid immediately):
Debit: Environmental Expenses $20,000
Credit: Accounts Payable $20,000
• 🎭 ENTERTAINMENT EXPENSES
Entertainment expenses are costs incurred in connection with client and employee entertainment, such as tickets to sporting events, concerts, and shows.
Example Journal Entry
To record entertainment expenses for a client dinner, which cost $500:
Debit: Entertainment Expenses $500
Credit: Cash $500
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