What are the Non-Operating Expenses?
Non-operating expenses, also known as non-recurring items, are the expenses which not related to the principal activities of a business and are usually stated on the company’s income statement for the period below the results from the continuing operations.
The person conducting the analysis of the financial health of the company generally removes non-operating revenues and expenses in order to correctly examine the company’s year over year performance.
Most Common Examples of Non-Operating Expenses (list)
- Lawsuit Settlements
- Losses from Investments
- Restructuring Costs
- Gains/Losses on Sale of Subsidiary/Assets
- Writedown of Inventory / Receivables
- Damages Caused to Fire
- expropriation of the company’s property
- Losses as a result of natural calamities like earthquake, floods or Tornadoes
- Gain or loss from early retirement of debt
- Intangible Assets Writeoff
- Discontinued Operations
- Changes in Accounting Principles
Let’s see some example Case Studies of non – operating expenses to understand it better.
- Company A ltd is in the business of providing the telecom services to the customer. During the year the company sold one of its buildings at the loss of $ 100,000 resulting in the expense for the company. This loss will be treated as the non – operating expense of the company as the same does not arise because of the core operations of the company. Also, during the same period company paid the one-time insurance premium at the beginning of the year for the whole year to one of the insurance company for the purpose of covering various types of the loss that could arise from different types of unforeseen events like flood, theft, earthquake, etc. This amount paid for the insurance premium will also be treated as the non – operating expense of the company as the same does not arise because of the core operations of the company. All these non – operating expenses of the company will be clubbed together and will be shown under the head non-operating income in the income statement of the company below the results from the continuing operations.
- There is a company which deals in the international markets for buying and selling its products. These companies conduct the transactions using the foreign currency so, there are chances of the exchange rate loss or currency loss to these companies. These type of losses happens in the company when there is wide currency fluctuates in the market which is unfavorable for the company. So this leads to the currency loss to the company. These exchange rate loss or currency loss are treated as the non-operating expenses of the company and will be clubbed together and will be shown under the head non-operating income in the income statement of the company below the results from the continuing operations.
- The person conducting the analysis of the financial health of the company generally calculates the non-operating expenses of the company and deducts the same from the income of the company from its operation in order to examine the company’s performance and estimating its maximum potential earnings.
- When the non-expenses are calculated separately and shown separately in the income statement of the company, then it presents the clear detailed picture of the company to all its stakeholders and helps to assess actual performance of the business in far better way and if any problem with respect to such nonoperating expenses occurs then the same could also be brought in the notice of the management of the company.
- There are some expenses which sometimes creates confusion in the mind of the person bifurcating the expense that whether it should be treated as the operating and non-operating costs. So, the person doing bifurcation of the expense should have proper knowledge about the expenses which are operating and expenses which are nonoperating for the company then only it is worth to bifurcate the same.
- One expense can be non-operating for one company whereas the same could be operating for the other company. So, there are no standard criteria for its bifurcation. this requires time and efforts of the person for the proper segregation of the expenses.
- They are the expenses which occur outside of the day to day activities of the company.
- once the total of all of the items of the non-operating head is derived then it will be deducted from the total of the income from operations to derive the net earnings of the company during the period.
- These expenses of the company also include the one-time expenses incurred or the unusual costs.
- When the non-expenses are calculated separately and shown separately in the income statement of the company, then it presents a clear detailed picture of the company to all its stakeholders.
As some of the events are uncertain, it is completely possible for companies which run a sound business to incur unusual expenses. These expenses are generally treated as the nonoperating expenses of the company as these expenses do not arise because of the core operations of the company. When non-operating expenses are shown separately on its income statement, it allows the managers, investors and the other stakeholders of the company to assess the actual performance of the business in far better way and if any problem with respect to such nonoperating expenses occurs then the same could also be brought in the notice of the management of the company so that necessary corrective actions could be taken on time.
This has been a guide to what are non operating expenses and it’s meaning. Here we discuss the list of most common examples of non-operating expenses along with advantages and disadvantages. You can learn more about financing from the following articles –