Since these assets don’t generate any cash, they can’t be used as collateral for loans or conversion into equity. Also, although noncash expenses do not cost a business any money, they still have a monetary value and are therefore very important and should be accurately accounted for. Examples of things that could incur noncash expenses include:
Depreciation of assets such as machinery, vehicles, and buildingsRent and occupancy costs for leased buildings or office spaceInsurance premiums for things like general liability insurance, workers compensation insurance, fire, and theft coverage on propertyOffice equipment
Types of Noncash Expenses
There are four common types of noncash expenses for small businesses to be aware of: depreciation, depletion, amortization, and deferred charges.
Depreciation
Depreciation is an accounting method used to recognize the decline in value of fixed assets (property, plant & equipment) over time. Depreciation is a tax-deductible expense, as long as it meets certain IRS requirements.
Depletion
Depletion is an accounting method used to recognize the decrease in the value of certain resources over time, such as mineral rights or oil fields.
Amortization
Amortization is the process used to determine the annual costs for intangible assets and reduce them from balance sheet account balances to reflect a pattern of using them up equally during each year’s period.
Deferred Charges
These charges are costs that will not be incurred until sometime in the future. Common small business deferred charges include prepaid rent
How Do You Account for Noncash Expenses?
Noncash expenses are usually considered assets in financial statements. As they are essential for business operations, it’s important to be able to assign value and identify them from other types of expenses like cash or credit card purchases. This will help with getting an accurate idea of how much money a business has coming in versus what’s going out, which is necessary for a business’s financial stability. Noncash expense reporting is the process of assigning value to in-kind goods and services. It is important for businesses to do this because it helps with understanding the true financial picture of a business. To report noncash expenses on taxes, you need to calculate the total cost of the depreciation, amortization, and depletion of the item from that year. You then take this number and add it to your gross income number on your tax return.
Straight-line depreciationSum of the years’ digits depreciationAccelerated depreciationDouble declining balance depreciation
Use an amortization calculator to determine what your future loan repayments are going to be.
