Companies often incur expenses that aren’t directly related to the day-to-day operatingcostsof running the business. These are categorized as non-operating expenses, and it’s agoodaccounting practice to tally them separately on a company’s income statement. Thismakes iteasier for financial managers, investors and other stakeholders to get a clearer picture ofthe performance of the business.
What Is a Non-Operating Expense?
A non-operating expense is a cost that isn’t directly related to core businessoperations.Examples of non-operating expenses are interest payments on debt, restructuring costs,inventory write-offs and payments to settle lawsuits. By recording non-operating expensesseparately from operating expenses, stakeholders can get a clearer picture of companyperformance.
Key Takeaways
- A non-operating expense is a cost from activities that aren’t directly related tocore,day-to-day company operations.
- Examples of non-operating expenses include interest payments and one-time expensesrelated to the disposal of assets or inventory write-downs.
- Non-operating expenses generally appear near the bottom of a company's income statementafter operating expenses.
Non-Operating Expenses Explained
To get a clear picture of the performance of a business, it generally makes sense to separateout expenses and income sources that aren’t directly related to core businessoperations.For example, a business might be profitable, but a one-time cost such as a write-off ofobsolete inventory could result in a net loss. On the other hand, the company might sell anon-core business line, realizing a gain that temporarily boosts its bottom line.
Keeping these non-operating expenses and income separate on the company’s financialstatements makes it easier to see how the core business performed during any specificaccounting period. This also helps to track trends in performance and more accuratelyforecast how the business will perform in the future. Accounting softwarehelps with the basic financial tracking to make the predictions and planning as accurate aspossible.
Operating vs Non-Operating Expenses: What’s the Difference?
Operating expenses arethose directly associated with running the business — although they don’tinclude cost of goods sold (COGS), which isgenerally listed separately on a company’s income statement.
What Is an Operating Expense?
Operating expenses include a wide variety of expenses for day-to-day operations, includingadministrative and sales costs. Examples include:
- Staff salaries
- Office supplies
- Sales-related costs such as commissions, marketing and advertising
- Research and development costs
- Rent, utilities and insurance premiums
- Everyday repairs to equipment
- Travel expenses related to normal business activities
Key differences between operating and non-operating expenses:
Operating expenses are costs that a company must make to perform its operating activities—the primary activities that generate revenue. Non-operating expenses are costs that were notdirectly required for those activities.
Capital Expenses vs Operating Expenses
Capital expenditures are a type of expense that is treated differently than operating andnon-operating expenses.
What is a capital expense?
In accounting terms, a capital expense is a cost that a business incurs to buy or add valueto an asset. An asset is defined as an item with a future economic benefit, such as an officebuilding or equipment with a service life of several years. A significant upgrade to anexisting asset is also considered a capital expenditure.
Key differences between capital expenses and operating expenses:
While the costs of performing operating activities are considered operating expenses, thecosts of acquiring assets to support those activities are generally capital expenses. Forexample, buying expensive office equipment is a capital expense; day-to-day repairs andmaintenance to keep that equipment running are operational expenses.
Recording capital expenses: Capital expenses are notrecorded on income statements when the asset is purchased. Instead, they are documented asassets on a company's balance sheet.
However, some assets decrease in value over time, a process known as depreciation (for fixedtangible assets such as computers or other business equipment) or amortization (forintangible assets such as intellectual property). The depreciation or amortization duringeach accounting period is calculated and reflected as an expense on the income statement. Ifthe asset is used for core business activities, this expense is categorized as an operatingexpense.
Capital Expenses vs Non-Operating Expenses
Capital expenses are also treated differently from non-operating expenses, since capitalexpenses are initially documented as assets on the balance sheet while operating expensesappear on the income statement. The asset’s depreciation or amortization may berecorded asa non-operating expense if the asset is not used for the core business.
9 Common Types of Non-Operating Expenses
Common types of non-operating expenses include:
Interest payments: Many companies finance their growth by taking ondebt. Interest payments on these loans are considered non-operating expenses becausethey are not directly related to core operating activities.
Losses from investments: Companies may have investments in othercompanies or in financial instruments. Losses on these investments may be recordedas non-operating losses and are non-operating expenses.
Losses on sale or write-off of assets: One-time transactions thatresult in losses can also be considered non-operating expenses. For example, asubsidiary could be sold at a loss or simply closed.
Inventory write-downs: Losses can be generated by the write-down orwrite-off of unsold inventory that has become obsolete.
Lawsuit settlements: While everyday legal fees associated withoperating activities are operating expenses, a one-time legal settlement is anon-operating expense.
Restructuring costs: Companies may incur one-time expenses as aresult of a restructuring designed to improve competitiveness or businessefficiency.
Currency fluctuations: If a company has operations in othercountries or sales in foreign currencies, fluctuations in currency exchange ratescan lead to losses that are recorded as non-operating expenses.
Disasters: Losses due to one-time events such as natural disastersare accounted for as non-operating expenses.
Changes in accounting principles: Changes in the accountingmethod used by the company can result in changes in the recorded value ofassets or liabilities. Losses due to these changes are recorded as non-operatingexpenses.
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Recording Non-Operating Expenses
Non-operating expenses are generally maintained in separate general ledger accounts fromoperating expenses.
Operating Expenses on Income Statements
Non-operating expenses are listed near the bottom of a company’s income statementafter operating expenses. Some companies distinguish between the different types ofnon-operating expenses listed in income statements. For example, interest payments may belisted separately from unusual or extraordinary non-operating expenses such as a one-timewrite-down of inventory or damage due to a natural disaster.
Non-operating expenses are generally grouped together with non-operating income (income fromnon-operating activities, such as interest on investments) on the income statement.
Non-Operating Expense Examples
Home Depot’s income statement for the 2019 fiscal year showed operating income of$15,843million after deducting operating expenses (including depreciation and amortization) fromnet sales.
The company reported non-operating expenses (listed as “interest and other (income)expense”)of $1,201 million in interest expense, offset by $73 million in non-operating income frominterest and investments. Net non-operating expense was therefore $1,128 million ($1,201million - $73 million). This amount was deducted from operating income to calculate earningsbefore income taxes of $14,715 million.
| Selected items from Home Depot income statement for thefiscal year ended Feb. 2, 2020 (amounts in $ millions) | |
|---|---|
| Net sales | 110,225 |
| Cost of sales | 72,653 |
| Gross profit | 37,572 |
| Operating Expenses | |
| Selling, general and administrative | 19,740 |
| Depreciation and amortization | 1,989 |
| Total operating expenses | 21,729 |
| Operating income | 15,843 |
| Interest and other (income) expense | |
| Interest and investment income | (73) |
| Interest expense | 1,201 |
| Interest and other, net | 1,128 |
| Earnings before provision for income taxes | 14,715 |
Non-Operating Expenses FAQ
Why should a company separate out non-operating expenses?
Separating non-operating expenses and income separate on financial statements makes it easierto see how the core business performed during a given accounting period. This also helps totrack trends in performance and more accurately forecast how the business will perform inthe future.
What types of businesses have non-operating expenses?
Most businesses will have some sort of non-operating expenses. While larger companies arelikelier to have expenses like restructuring costs and investment losses than smallbusinesses, businesses of all sizes are likely to make interest payments depreciate assets.
What are the benefits of recording non-operating expenses?
Recording non-operating expenses is a standard accounting practice. Keeping an accuraterecord of non-operating expenses allows companies to deduct them from operating profits.
