Companies often incur expenses that aren’t directly related to the day-to-day operating costs of running the business. These are categorized as non-operating expenses, and it’s a good accounting practice to tally them separately on a company’s income statement. This makes it easier for financial managers, investors and other stakeholders to get a clearer picture of the performance of the business.
What Is a Non-Operating Expense?
A non-operating expense is a cost that isn’t directly related to core business operations. Examples of non-operating expenses are interest payments on debt, restructuring costs, inventory write-offs and payments to settle lawsuits. By recording non-operating expenses separately from operating expenses, stakeholders can get a clearer picture of company performance.
- A non-operating expense is a cost from activities that aren’t directly related to core, day-to-day company operations.
- Examples of non-operating expenses include interest payments and one-time expenses related to the disposal of assets or inventory write-downs.
- Non-operating expenses generally appear near the bottom of a company's income statement after operating expenses.
Non-Operating Expenses Explained
To get a clear picture of the performance of a business, it generally makes sense to separate out expenses and income sources that aren’t directly related to core business operations. For example, a business might be profitable, but a one-time cost such as a write-off of obsolete inventory could result in a net loss. On the other hand, the company might sell a non-core business line, realizing a gain that temporarily boosts its bottom line.
Keeping these non-operating expenses and income separate on the company’s financial statements makes it easier to see how the core business performed during any specific accounting period. This also helps to track trends in performance and more accurately forecast how the business will perform in the future. Accounting software helps with the basic financial tracking to make the predictions and planning as accurate as possible.
Operating vs Non-Operating Expenses: What’s the Difference?
Operating expenses are those directly associated with running the business — although they don’t include cost of goods sold (COGS), which is generally 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, including administrative 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 not directly required for those activities.
Capital Expenses vs Operating Expenses
Capital expenditures are a type of expense that is treated differently than operating and non-operating expenses.
What is a capital expense?
In accounting terms, a capital expense is a cost that a business incurs to buy or add value to an asset. An asset is defined as an item with a future economic benefit, such as an office building or equipment with a service life of several years. A significant upgrade to an existing 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, the costs of acquiring assets to support those activities are generally capital expenses. For example, buying expensive office equipment is a capital expense; day-to-day repairs and maintenance to keep that equipment running are operational expenses.
Recording capital expenses: Capital expenses are not recorded on income statements when the asset is purchased. Instead, they are documented as assets on a company's balance sheet.
However, some assets decrease in value over time, a process known as depreciation (for fixed tangible assets such as computers or other business equipment) or amortization (for intangible assets such as intellectual property). The depreciation or amortization during each accounting period is calculated and reflected as an expense on the income statement. If the asset is used for core business activities, this expense is categorized as an operating expense.
Capital Expenses vs Non-Operating Expenses
Capital expenses are also treated differently from non-operating expenses, since capital expenses are initially documented as assets on the balance sheet while operating expenses appear on the income statement. The asset’s depreciation or amortization may be recorded as a 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 on debt. Interest payments on these loans are considered non-operating expenses because they are not directly related to core operating activities.
Losses from investments: Companies may have investments in other companies or in financial instruments. Losses on these investments may be recorded as non-operating losses and are non-operating expenses.
Losses on sale or write-off of assets: One-time transactions that result in losses can also be considered non-operating expenses. For example, a subsidiary could be sold at a loss or simply closed.
Inventory write-downs: Losses can be generated by the write-down or write-off of unsold inventory that has become obsolete.
Lawsuit settlements: While everyday legal fees associated with operating activities are operating expenses, a one-time legal settlement is a non-operating expense.
Restructuring costs: Companies may incur one-time expenses as a result of a restructuring designed to improve competitiveness or business efficiency.
Currency fluctuations: If a company has operations in other countries or sales in foreign currencies, fluctuations in currency exchange rates can lead to losses that are recorded as non-operating expenses.
Disasters: Losses due to one-time events such as natural disasters are accounted for as non-operating expenses.
Changes in accounting principles: Changes in the accounting method used by the company can result in changes in the recorded value of assets or liabilities. Losses due to these changes are recorded as non-operating expenses.
Recording Non-Operating Expenses
Non-operating expenses are generally maintained in separate general ledger accounts from operating expenses.
Operating Expenses on Income Statements
Non-operating expenses are listed near the bottom of a company’s income statement after operating expenses. Some companies distinguish between the different types of non-operating expenses listed in income statements. For example, interest payments may be listed separately from unusual or extraordinary non-operating expenses such as a one-time write-down of inventory or damage due to a natural disaster.
Non-operating expenses are generally grouped together with non-operating income (income from non-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 $15,843 million after deducting operating expenses (including depreciation and amortization) from net 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 from interest and investments. Net non-operating expense was therefore $1,128 million ($1,201 million - $73 million). This amount was deducted from operating income to calculate earnings before income taxes of $14,715 million.
|Selected items from Home Depot income statement for the fiscal year ended Feb. 2, 2020 (amounts in $ millions)
|Cost of sales
|Selling, general and administrative
|Depreciation and amortization
|Total operating expenses
|Interest and other (income) expense
|Interest and investment income
|Interest and other, net
|Earnings before provision for income taxes
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 easier to see how the core business performed during a given accounting period. This also helps to track trends in performance and more accurately forecast how the business will perform in the future.
What types of businesses have non-operating expenses?
Most businesses will have some sort of non-operating expenses. While larger companies are likelier to have expenses like restructuring costs and investment losses than small businesses, 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 accurate record of non-operating expenses allows companies to deduct them from operating profits.