What is a non-monetary item?
A non-monetary item has two different meanings. In banking, the term is used to describe a negotiable instrument, like a check or bank draft, which is deposited but can only be credited after the issuer’s account has been cleared.
Key points to remember
- In banking, a non-cash item is a negotiable instrument, such as a check or bank draft, which is deposited but cannot be credited until it has settled the issuer’s account. .
- In accounting, a non-cash item refers to an expense listed in an income statement, such as depreciation of capital, investment gains or losses, which does not involve a cash payment.
Understanding non-monetary items
The income statement, a tool used by companies to financial state to tell investors how much money they made and lost, can include several things that affect profits but not cash flow. It is because in accrual accounting, companies measure their income by also including transactions that do not involve a cash payment to give a more accurate picture of their current financial situation.
Banks often suspend a large non-cash item, such as a check, for up to several days, depending on the customer’s account history and what is known about the payer (for example, if the the issuing body has the financial means to cover the checks presented).
The short period during which the two banks have the funds – between presenting the check and withdrawing the money from the payer’s account – is called the float.
Example of depreciation and amortization
Depreciation and amortization are perhaps the two most common examples of expenses that reduce taxable income without impact on cash flow. Companies take into account the deterioration in the value of their assets over time in a process known as depreciationIation for tangible and depreciation for intangible.
For example, suppose a manufacturing company called Company A pays $ 200,000 for new high-tech equipment to help increase production. The new machines are expected to last 10 years, so Company A’s accountants advise spreading the cost over the entire period of its useful life, rather than spending it all at once. They also take into account that the equipment has a salvage value, the amount it will be worth after 10 years, of $ 30,000.
Depreciation seeks to match income with associated expenses. Dividing $ 170,000 by 10 means that the equipment purchased will be presented as a non-cash expense of $ 17,000 per year over the next decade. However, no amount was actually paid when these annual expenses were recorded, so they appear in the income statement as a non-cash charge.
Non-monetary items appear frequently in financial statements, but investors often overlook them and assume everything is flawless. As with all areas of financial accounting, sometimes it pays to take a more skeptical approach.
One of the biggest risks associated with non-monetary items is that they are often based on guesswork, influenced by past experiences. Users of accrual accounting have consistently been found guilty, innocently or not, of failing to accurately estimate income and expenses.
For example, Company A’s equipment may need to be depreciated within 10 years, or may prove useful for longer than expected. Its estimated salvage value may also be wrong. Ultimately, businesses are required to update and report actual expenses, which can lead to big surprises.