A few of the Expense and Revenue accounts in the accounting system's Chart of accounts are noncash accounts. (Noncash and Noncash are also correct forms of the term).
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.
Noncash revenues and expenses also impact the Income statement "bottom-line" in the same way that cash revenues and expenses raise or lower net profits. Noncash accounts, however, have no impact on the firm's reported net cash flow for the period.
Explaining Noncash Account in Context
This article further defines and describes the terms noncash accounts, noncash revenue, and noncash expense, in the context of related concepts from accounting, finance, and business analysis. Sections below focus on two themes:
- Defining noncash revenues and expenses, and how noncash sums compare to cash expenses and revenues.
- The role of noncash revenues and expenses in deriving actual cash flow totals on the Statement of Changes in Financial Position (the Financial Cash Flow Statement).
- What are noncash accounts?
- How is it possible to have noncash revenues?
- What is a noncash expense?
- How is the cash flow statement (Statement of changes in financial position, SCFP) adjusted for noncash expenses and revenues?
- Example SCFP shows noncash adjustments.
The noncash 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 noncash revenues until the customer pays. Accountants sometimes call such revenues "unrealized revenues." In any case, these revenues will remain noncash revenues until either of two events occurs:
- The customer makes a cash payment.
- The seller decides that payment will not be forthcoming, in which case the seller can write-off the unrealized revenues as bad debt.
In accrual accounting, firms report noncash revenues as earned revenues on the Income statement, but they cannot add to the cash inflow total on the cash flow statement.
Transactions in noncash expenseaccounts 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 common noncash accounts are for depreciation expenses, but others include amortization and bad debt expenses.
Noncash expenses appear on the Income statement to reduce 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 money flows to the vendor, the buyer enters the full purchase amount 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. In other words, the payment action reduces the buyer's cash holdings 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) arrives piecemeal in this way, distributed across several years or more (as prescribed by a depreciation schedule for the asset).
Noncash 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 with the expenses that brought them. Suppose, for instance, that an asset helps earn revenues for 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 noncash 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, noncash expenses do not add to "Cash outflows" on the cash flow statement. Nevertheless, noncash 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, noncash 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 noncash 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 the source of cash flow numbers.
The example Statement of Changes in Financial Position in Exhibit 1 below shows how noncash accounts impact cash flow totals.