A non-cash item has two distinct meanings in the realms of banking and accounting. In banking, the term describes a negotiable instrument, such as a check or bank draft, that is deposited but cannot be credited until it clears the issuer’s account. Conversely, in accounting, a non-cash item refers to an expense listed on an income statement, like capital depreciation or investment gains and losses, that does not involve a cash payment.
Key Takeaways
- Banking Context: A non-cash item is a negotiable instrument—such as a check or bank draft—that is deposited but cannot be credited until it clears the issuer’s account.
- Accounting Context: A non-cash item refers to an expense listed on an income statement, such as capital depreciation or investment gains and losses, that does not involve a cash payment.
Understanding Non-Cash Items
Accounting
Income statements, tools companies use to inform investors about their earnings and losses, often include items that impact earnings but not cash flow. In accrual accounting, businesses measure their income by accounting for transactions that do not involve a cash payment to give a more accurate picture of their financial condition.
Some examples of non-cash items include deferred income tax, write-downs in the value of acquired companies, employee stock-based compensation, as well as depreciation and amortization.
Banking
Banks often place a hold of up to several days on a large non-cash item, such as a check, depending on the customer’s account history and what is known about the payor (e.g., whether the issuing organization has the financial means to cover the check). The short period during which both banks have the funds available to them—between when the check is presented and when the money is withdrawn from the payor’s account—is called the float.
Depreciation and Amortization Example
Depreciation and amortization are common examples of expenses that reduce taxable income without impacting cash flow. Companies account for the deteriorating value of their assets over time through depreciation for tangibles and amortization for intangibles.
For example, consider a manufacturing company that spends $200,000 on a new piece of high-tech equipment to boost production. The equipment is expected to last 10 years. Instead of expensing it all at once, the company will spread the cost over the equipment’s useful life, considering a salvage value of $30,000. Depreciation of the equipment will be calculated at $17,000 per year over the next decade. This expense is recorded as a non-cash charge on income statements, although no money is actually paid out annually.
Special Considerations
Non-cash items frequently appear in financial statements, yet they can be overlooked by investors who assume all figures are above board. Non-cash items often hinge on estimates based on past experiences, and errors in these estimates can result in future surprises. Businesses using accrual accounting sometimes fail to accurately estimate revenues and expenses, leading to potential discrepancies in financial reporting.
For example, the aforementioned manufacturing company’s equipment may become obsolete before 10 years, or it may be useful for longer. Its estimated salvage value may also be incorrect. Eventually, the business needs to update and report actual expenses, which can lead to significant adjustments.
Related Terms: negotiable instrument, capital depreciation, cash flow, income statement, accrual accounting.
