What Are Non Cash Accounts?
A few Expense and Revenue accounts in the accounting system's Chart of accounts are non cash accounts.
Transactions in these accounts do not involve payment or receipt of cash. Nevertheless, they conform to the accounting definitions for expenses and revenues because they ultimately decrease or increase owners equity on the Balance sheet.
Non cash revenues and expenses also impact the Income statement "bottom line" in the same way that cash revenues and expenses raise or lower net profits. Non cash accounts, however, have no impact on the firm's reported net cash flow for the period.
Explaining Non Cash Account in Context
This article further defines and explains the terms non cash accounts, non cash revenue, and non cash expense. Sections below show the role of non cash revenues and expenses in deriving actual cash flow totals on the Cash Flow Statement, as well as other business uses with the following terms:
- What are non cash accounts?
- How is it possible to have non cash revenues?
- What is a non cash expenses?
- How is the cash flow statement (Statement of changes in financial position) adjusted for non cash expenses and revenues?
- Example SCFP showing non cash adjustments.
Non cash revenue accounts include items such as accrued revenues (or unrealized revenues). A company may earn certain revenues in the current accounting period by closing a sale and shipping goods, but these are non cash revenues until the customer actually pays. Accountants sometimes call such revenues unrealized revenues. In any case, these revenues will remain non cash revenues until either of two events occurs:
- The customer makes cash payment.
- The seller decides that payment will not be forthcoming, in which case they can be written offas bad debt.
In accrual accounting, non cash revenues can be reported as earned revenues on the Income statement but they cannot add to the cash inflow total on the cash flow statement.
Transactions in non cash expense accounts meet the textbook definition of expense: Generally, they decrease owner’s equity by using up assets. They do not represent actual cash flow, however. The most familiar non cash accounts are for depreciation expenses, but others include amortization and bad debt expenses.
Non cash expenses appear on the Income statement for the purpose of reducing bottom line earnings, thereby lowering taxes. Consider, for instance, a company buying an expensive asset entirely with cash:
Buyer's Cash Holdings on Balance Sheet Decrease By Full Purchase Amount
When cash flows to the vendor, the full purchase amount is entered as a Credit (CR) to one of the buyer's asset accounts, most likely "Cash on hand." In double entry accounting, a credit transaction decreases the balance in an Asset account. This shows that the buyer's cash holdings are reduced by the full amount of the purchase.
At the end of the reporting period, the full purchase amount appears on the buyer's cash flow statement (statement of changes in financial position) under "Uses of cash."
The Buyer's Income Statement Reports Expenses Less Than Purchase Amount
On the buyer's Income statement for the period, however, only part of the purchase amount appears, and this in the guise of a depreciation expense. The full purchase amount—or most of it—will appear in this form, distributed across several years or more (as prescribed by a depreciation schedule for the asset).
Non Cash Depreciation Expense Helps Apply Matching Concept
Spreading an asset purchase expense across several years of asset life helps the buyer apply the matching concept in accrual accounting. This principle requires that firms report revenues in the same period they report the expenses that brought them. Suppose, for instance, that an asset helps earn revenues for a period of five years. Firms use depreciation expense to achieve matching, by spreading the asset cost across the same five years. As a result, firms report actual earnings for these years accurately.
Because non cash revenues are not real cash flow, they do not add to "Total cash Inflows" on the cash flow statement (statement of changes in financial position). Similarly, non cash expenses do not add to "Cash outflows" on the cash flow statement. Nevertheless, non cash revenues and expenses are indeed visible on the cash flow statement. They appear on the cash flow statement to show how actual cash inflows and outflows derive from Income statement revenue and expenses figures.
Cash Flow Calculated From Income Statement Figures
- The cash flow statement approaches the "Total cash inflows" figure by starting with the Income statement "Total sales and investment revenues."
- As the example below shows, however, non cash revenues are immediately subtracted from this total.
- The cash flow statement then takes a starting "Total expenses" figure from the Income statement, and then "adds back" the individual non cash expense items that are part of the Income statement expense total.
- Net cash inflow is then the difference between the new revenues total and the new expense total.
It is useful to structure the cash flow statement this way, so that everyone can see clearly the source of cash flow numbers.