What Is a Non-Operating Expense?
A non-operating expense is a business expense unrelated to core operations. The most common types of non-operating expenses are interest charges and losses on the disposition of assets. Accountants sometimes remove non-operating expenses and non-operating revenues to examine the performance of the core business, excluding the effects of financing and other items.
Non-operating expenses can be contrasted with operating expenses, which relate to the day-to-day functioning of a business.
- A non-operating expense is incurred when a cost doesn't directly relate to a firm's primary or core business.
- Non-operating expenses are deducted from operating profits and accounted for at the bottom of a company's income statement.
- Examples of non-operating expenses include interest payments, write-downs, or costs from currency exchanges.
Understanding Non-Operating Expense
Non-operating expense, like its name implies, is an accounting term used to describe expenses that occur outside of a company's day-to-day activities. These types of expenses include monthly charges like interest payments on debt and can also include one-time or unusual costs. For example, a company may categorize any costs incurred from restructuring, reorganizing, costs from currency exchange, or charges on obsolete inventory as non-operating expenses.
Non-operating expenses are recorded at the bottom of a company's income statement. The purpose is to allow financial statement users to assess the direct business activities that appear at the top of the income statement alone. Generating profit from core operations is critical for a company.
When looking at a company's income statement from top to bottom, operating expenses are the first costs displayed below revenue. The company starts the preparation of its income statement with top-line revenue. Cost of goods sold (COGS) is subtracted from revenue to arrive at gross income.
After gross income is calculated, operating costs are subtracted to get the company's operating profit, or earnings before interest and tax (EBIT). After operating profit has been derived, non-operating expenses are subtracted from operating profit to arrive at earnings before taxes (EBT). Taxes are then calculated to derive net income.
Non-Operating Expense Examples
Most public companies finance their growth with a combination of debt and equity. Regardless of the allocation, any business that has corporate debt also has monthly interest payments. This is considered a non-operating expense because it's not commonly thought of as core operations.
If a company sells a building, and it's not in the business of buying and selling real estate, the sale of the building is a non-operating activity. If the building were sold at a loss, the loss is considered a non-operating expense.
Frequently Asked Questions
Why do companies separate out non-operating expenses?
When looking at how a company generates profits, understanding its profits from core operations, net of direct operating expenses, is critical. Costs unrelated to these operations impact the bottom line, but they may not indicate how well a company is running.
What are examples of non-operating expenses?
Interest payments, the costs of disposing of property or assets not related to operations, restructuring costs, inventory write-downs, lawsuits, and other one-time charges are common examples.
Are rent and utilities non-operating expenses?
Typically, no. These would both be directly related to a business' core operations, since without paying rent and utilities, the firm wouldn't be able to function.