Definition of a Noncash Expense
A noncash expense is an expense that is reported on the income statement of the current accounting period, but the related cash payment took place in another accounting period.
Example of a Noncash Expense
Perhaps the most common example of a noncash expense is depreciation. To illustrate, let’s assume that a company purchased equipment two years ago for a cash payment of $200,000. The company determined that the equipment had a useful life of 10 years. As a result, the company’s income statement will report depreciation expense of $20,000 a year for 10 years. The current year’s income statement is reporting depreciation expense of $20,000 but there is no cash payment in the current year for this expense. This is why depreciation expense is referred to as a noncash expense.
This also explains why the operating activities section of the statement of cash flows usually begins with a company’s net income and then immediately adds the period’s depreciation expense. In effect the noncash depreciation expense is added back because the depreciation expense had reduced the company’s net income reported on the income statement, but it did not use any cash during that period of time.
