One of the items in the cash flow that a business owner has to understand is non-cash expenses. What is it? Read on and find out.
One of the items in the cash flow that a business owner has to understand is non-cash expenses. If the term is still vague to you, read on and learn more about non-cash expenses and how do they affect the positive cash flow of your business.
Non-Cash Expenses Defined
The Free Dictionary simply defines it as an expense that is not paid for in cash. According to the Business Literacy Institute, an example of non-cash expenses is depreciation. When accountants prepare the business’ cash flow statement, they need to include a deductible amount each month for the depreciation of equipment or facilities. The business does not pay for this amount in cash. One might ask, how can an expense not be paid in cash? Business Literacy illustrated non-cash expenses this way. If you have bought a car wash equipment, you need to include depreciation per month in your balance sheet. If the equipment is expected to last for 5 years, you need to divide the total amount you paid for the equipment by (12 months times 5 years = 60). Let’s say the equipment is $6,000 and you divide it by 60. You will then need to deduct $100 every month for the depreciation of this specific car wash equipment.
Non-Cash Expenses: Examples
Pak Accountants adds that non cash expenses are those that are recognized as expenses but are not backed up with outflow of resources either in cash or cash equivalents. Apart from depreciation, there are still non-cash expenses examples. Here are some of them: amortization expenses, impairment expenses, amortization of bad issue costs, restructuring charges, non controlling interest, bad debt expenses, etc.
Non-Cash Expenses in your Income Sheet
These non-cash expenses are standard feature of income statements. According to Business Case Analysis, these non-cash expenses are important because they can decrease or increase owner’s equity on the balance sheet. If these non-cash expenses correctly reported on your income statement, they will reduce reported earnings. Thus, can lower the tax. According to Investing Answers.com, the separation of the cash expenses from the non-cash expenses is very important because this can give the business owner a more realistic picture of the cash flow. The net income may be overestimated when the non-cash expenses are not included in the deductions. Accounting Base.com mentions that “if a completed cash flow statement shows changes in cash which when added to the opening cash balance (cash balance on the prior period balance sheet) does not add back to the closing cash balance (cash balance on this period’s balance sheet), then it is clear that something went wrong when the Cash Flow Statement was prepared.”
The cash flow statement and the items included in this document need expert skills or at least support from more equipped consultants. If you need assistance, make sure you seek the help of the right people as your cash flow and income statements can greatly affect your business.
Perhaps the safest way to make sure you include the non cash expenses in your balanced sheets correctly is to partner with the experts in the industry. Discover the DetailXperts opportunity. We will help you in the financial details and requirements including the nitty-gritty things in your financial statements. You will be assured of a stress-free franchisor-franchisee relationship with DetailXperts.
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