Definition:
A noncash expense is one that is charged to a period on the income statement but is not actually paid out in cash. An example is depreciation: accountants deduct a certain amount each month for depreciation of equipment, but the company isn’t obliged to pay out that amount, because the equipment was acquired in a previous period.
Example:
Let’s say your delivery business needs a new truck, you spend $36,000 in cash to purchase the truck. That will show up on the balance sheet as a decrease in cash and an increase in assets. The next step is to depreciate the truck over its useful life. For this example we will use 3 years, for the next 36 months we will depreciate the truck by $1,000 per month:
36,000 / 36 = $1,000
The $1,000 noncash expense shows up on our income statement as depreciation.
Book Excerpt:
(Excerpts from Financial Intelligence, Chapter 25 – The Investor’s Perspective)
Depreciation is a prime example of what accountants call a noncash expense. Right here, of course, is where they often lose the rest of us. How can an expense be other than cash? The key to that puzzling term is to remember that the cash has probably already been paid. The company already bought the truck. But the expense wasn’t recorded that month, so it has to be allocated over the truck’s life, a little at a time. No more money is going out the door; rather, it’s just the accountant’s way of figuring that this month’s revenue depends on using that truck, so the income statement had better have something in it that reflects the truck’s cost.
