What is a Non-Operating Expense?
A non-operating expense is a business expense unrelated to the 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 business, ignoring effects of financing and other irrelevant issues.
- A non-operating expense is an expense incurred from activities unrelated to core operations.
- 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 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 but can also include one-off 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. It is important for a business' future outlook that its core business operations generate a profit.
Examples of Non-Operating Expense
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 on the amount borrowed. This monthly interest payment is considered a non-operating expense because it does not arise due to a company's core operations.
If a company sells a building, and it is not in the business of buying and selling real estate, the sale of the building is a non-operating activity. If the building sold at a loss, the loss is considered a non-operating expense.
Recording Non-Operating Expense
When looking at a company's income statement from top to bottom, operating expenses are the first costs displayed just below revenue. The company starts the preparation of its income statement with top-line revenue. The firm's cost of goods sold (COGS) is then subtracted from its revenue to arrive at its gross income. After gross income is calculated, all operating costs are then subtracted to get the company's operating profit, or earnings before interest, tax, depreciation, and amortization (EBITDA). Then, after operating profit has been derived, all non-operating expenses are recorded on the financial statement. Non-operating expenses are subtracted from the company's operating profit to arrive at its earnings before taxes (EBT). Taxes are then assessed to derive the company's net income.