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Business Financials – What are Non-Cash Expenses and where are they in Reports?
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Published on Friday, 14 August 2015 15:25
A business can have non-cash expenses which are expenses that are on the Profit & Loss / Income Statement of the current period, but where no cash payment during the period has actually occurred.
One example of a non-cash expense is depreciation. For example, if a company purchased equipment on Oct 31, 2014 for $8,000 cash (depending on the allowed proportion by the ATO for the asset type) it could have a Depreciation Expense of $800 in each of the next 10 years. Since there is no cash payment in any of those years, each year’s $800 of Depreciation Expense is known as a non-cash expense, and reduces profits (that companies pay tax on).
Another example in a large company is amortization of bond issue costs. Say 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 record the $250,000 of bond issue costs to the balance sheet and will then amortize the cost (send part of the cost to expense) at a rate of $25,000 per year. In each year of the bonds’ life the corporation’s Profit & Loss reports $25,000 of bond issue costs expense which will be a non-cash expense.
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