What is a non‑cash item?
A non‑cash item is any entry on a company’s financial statements that affects reported profit or loss but does not involve a contemporaneous cash inflow or outflow. The term is also used in banking to describe a negotiable instrument (for example, a check or bank draft) that has been deposited but for which funds cannot yet be credited until the instrument clears.
This article explains both uses, shows common examples, gives simple calculations and journal entries, and provides practical checklists for analysts, accountants, managers and bank customers.
Key concepts (short)
– Accounting meaning: expenses, gains or losses recorded under accrual accounting that do not immediately move cash (e.g., depreciation, amortization, impairment, stock‑based compensation, deferred taxes).
– Banking meaning: a deposited negotiable instrument that is credited only after collection (subject to holds and “float”).
– Why it matters: non‑cash items affect reported earnings and taxes but not necessarily cash flow; users must adjust and analyze to understand actual liquidity and earnings quality.
1. Non‑cash items in accounting — what they are and why they exist
– Accrual accounting records revenues and expenses when they are earned or incurred, not when cash changes hands. To reflect economic reality over time, accountants record certain non‑cash items that allocate or estimate costs across periods.
– Common categories:
– Depreciation (allocation of tangible asset cost over useful life).
– Amortization (allocation of intangible asset cost).
– Impairments / write‑downs (reducing asset carrying value when recoverable value falls).
– Stock‑based compensation (recognition of employee compensation expense for equity awards).
– Deferred tax adjustments (timing differences between tax and accounting income).
– Bad‑debt expense / allowance for doubtful accounts.
– Gains or losses on revaluation or sale of assets (non‑cash accounting gain reduces operating cash flow when reported in net income).
– Effect: These items reduce or increase net income on the income statement but do not immediately change the company’s cash position. They do, however, affect balance sheet accounts (accumulated depreciation, asset carrying amounts, reserves).
2. Banking meaning — non‑cash (negotiable) instruments, holds and float
– When you deposit a check or bank draft, the receiving bank may place a hold until it collects funds from the issuer’s bank. During the period between deposit and final collection, the funds may be in transit or on “float.”
– Factors that determine holds: amount, depositor’s account history, type of instrument, payor’s reputation, regulatory rules.
– In the U.S., Regulation CC governs availability of funds and maximum hold periods for many deposits.
– Practical implication: Funds credited to your account from a deposited check are not final until the item clears; a returned check can reverse the credited amount.
3. Common examples and simple calculations
A. Straight‑line depreciation (example)
– Purchase price = $200,000; salvage value = $30,000; useful life = 10 years.
– Depreciable base = 200,000 − 30,000 = 170,000.
– Annual depreciation (straight‑line) = 170,000 / 10 = 17,000.
– Journal entry each year: Debit Depreciation Expense 17,000; Credit Accumulated Depreciation 17,000.
– Effect: Income statement expense reduces net income by 17,000; cash is unaffected in that year.
B. Amortization (example)
– Intangible asset cost = $50,000; useful life = 5 years.
– Annual amortization = 50,000 / 5 = 10,000.
– Journal entry: Debit Amortization Expense 10,000; Credit Accumulated Amortization 10,000.
C. Impairment / write‑down (illustrative)
– If an asset’s recoverable value falls below carrying amount, record impairment expense immediately, reduce asset carrying value and recognize a non‑cash loss that lowers net income but not immediate cash.
4. How analysts and investors use and adjust for non‑cash items
Because non‑cash items affect earnings but not cash, analysts commonly adjust reported net income to better assess underlying cash generation and recurring performance.
Practical steps — reconciling to operating cash flow
1. Start with net income (from the income statement).
2. Add back non‑cash expenses (e.g., depreciation, amortization, stock‑based compensation, impairment charges).
3. Subtract non‑cash gains (e.g., gains on asset sales).
4. Adjust for working capital changes (accounts receivable increases, inventory build, accounts payable movement).
5. Result = cash provided by (used in) operating activities (statement of cash flows).
Common adjustments and why:
– Add depreciation/amortization because these are accounting allocations, not cash outflows in the current period.
– Add stock‑based compensation because it is non‑cash but dilutive; treat separately when estimating free cash flow per share.
– Add back impairment only for a one‑time analysis (but consider that impairment signals potential recurring issues).
– Subtract gains on asset sales that increased net income but are investing cash flows, not operating cash flows.
Using non‑GAAP metrics carefully
– EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is useful for comparing operating profitability without capital structure and non‑cash depreciation effects, but it omits capital expenditures and some non‑cash items (like stock comp) and can overstate cash earning power.
– When companies present adjusted earnings (core EPS, adjusted EBITDA), review disclosures to see which non‑cash items are added back and whether exclusions are recurring or one‑time. Regulators (e.g., SEC) expect clear reconciliation and disclosure.
5. Accounting control points and management judgments
– Many non‑cash items rely on estimates: useful lives and salvage values for depreciation, amortization periods, assumptions for impairment tests, collectibility for receivables.
– Because they are judgmental, non‑cash items are fertile ground for errors and (intentional or unintentional) manipulation. Watch for:
– Frequent changes to useful lives or salvage values.
– Large or repeated one‑time adjustments and “catch‑up” impairments.
– Unexplained increases or decreases in reserves (e.g., doubtful accounts).
– Significant differences between reported net income and operating cash flow.
– Best practice for auditors and analysts: read the footnotes and accounting policy disclosures; check sensitivity and assumptions underlying key estimates.
6. Practical checklists
For investors / analysts — evaluating non‑cash items
– Compare net income to operating cash flow for past periods; large divergences warrant investigation.
– Identify large non‑cash items in the income statement; classify them as recurring (depreciation) or one‑off (impairment).
– Read footnotes for policies on depreciation methods, estimated useful lives, impairment test assumptions, stock‑based compensation valuation.
– Adjust valuation models for sustainable cash generation: add back recurring non‑cash expenses; exclude non‑operating, non‑recurring items.
– Watch for management commentary on write‑downs and future capital expenditures.
For corporate accountants / managers — handling non‑cash items properly
– Set and document clear policies for useful lives, salvage values and amortization methods.
– Run regular impairment assessments and retain evidence supporting recoverable amounts.
– Disclose material non‑cash items clearly in the notes and in management discussion & analysis (MD&A).
– When restructuring or making one‑time changes, explain rationale and expected future effect.
For bank customers — dealing with deposited non‑cash instruments
– Expect holds on large or out‑of‑state checks; ask your bank about hold policies and typical clearance times.
– If you need immediate funds, use electronic transfers (ACH, wire) which settle faster and reduce float risk.
– Monitor your account: a check credited to your account may still be returned if the payor’s bank later denies payment.
– If funds are time‑sensitive (payroll, payments), verify availability or use guaranteed instruments (cashier’s check, wire transfer).
7. Red flags and cautionary signs
– Growing frequency and size of goodwill or asset impairments — may indicate overpayment for acquisitions or declining business prospects.
– Repeated “one‑time” adjustments — could be management smoothing or earnings manipulation.
– Net income increases while operating cash flow falls — earnings quality concern.
– Sudden and large changes in assumptions (useful lives, discount rates) without economic justification.
8. Conclusion
Non‑cash items are a normal and essential part of accrual accounting and banking operations. Properly understood and analyzed, they help match costs to revenues and reflect economic reality. Misunderstood or misused, they can obscure cash performance and mislead users. Analysts should reconcile reported earnings to cash flows, inspect footnotes and treat discretionary or judgmental non‑cash items with extra scrutiny. Bank customers should be aware of holds and float when depositing negotiable instruments.
Sources and further reading
– Investopedia, “Non‑Cash Item,” Jessica Olah. https://www.investopedia.com/terms/n/noncash-item.asp
– U.S. Federal Reserve / Board of Governors, Regulation CC (funds availability). https://www.federalreserve.gov/paymentsystems/regcc-about.htm
– Financial Accounting Standards Board (FASB) — relevant ASC topics (e.g., ASC 360 on impairments; ASC 718 on stock‑based compensation). https://www.fasb.org
– International Accounting Standards Board (IASB), IAS 36 — Impairment of Assets; IAS 38 — Intangible Assets. https://www.ifrs.org
If you’d like, I can:
– Walk through a company’s financial statements and highlight the key non‑cash items for you, or
– Provide a spreadsheet template to reconcile net income to operating cash flow and normalize earnings. Which helps you most?