Non-cash items are referred to as those entries on a cash flow statement or income statement that do not involve actual cash transactions. In other words, these are expenses that are listed in an income statement that do not involve cash payment.
Non-cash items are useful for recording or tracking the wear and tear of assets or the changes taking place in value of the investments that haven’t been sold.
Importance of Non-cash Items
The income statement prepared by companies shows the investors how much money the company made and how much it lost. But, under accrual basis of accounting, income statements include some items that cause changes in earnings but not on the cash flow of the business.
It is a practice to include items that do not involve cash payments to provide a more accurate view of the financial position of the company under accrual basis of accounting.
Risks Associated with Non-Cash Items
Non-cash items carry a risk that most of the time they are based on guesses or are heavily influenced by past experiences. This leads to inaccurate estimation of revenue and expenses.
Examples of Non-cash Items
Examples of non-cash items include depreciation, amortization, deferred income tax, stock based compensation that is provided to employees.
This concludes our article on the topic of Non-Cash Items, which is an important topic in Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.