Non-cash expenses: Definition and common examples

As a business owner, you may have noticed line items on your financial statements that don’t seem to involve actual cash changing hands. Expenses like depreciation or amortization fall into this category. These are called non-cash expenses—costs that appear on your income statement even though no money leaves your bank account.

Understanding how non-cash expenditures affect your bottom line is essential for budgeting, evaluating profitability, and communicating financial health to investors. Common examples include amortization, depreciation, bad debt, asset impairment, and stock-based compensation.

What are non-cash expenses?

A non-cash expense is a business cost that reduces net income without requiring any actual cash outflow. You’ll see them listed on the income statement, but they don’t change the money flowing in or out of your bank account.

By contrast, cash expenses involve a direct payment for goods or services your company needs to operate. These outflows cover everyday obligations such as payroll, rent, interest, or taxes.

Here’s a quick side-by-side view:

Recognizing the distinction helps you better manage operating cash flow and avoid confusing net income with the actual cash available to run your business.

Why companies record non-cash expenses

Companies record non-cash expenses to give a more accurate picture of financial performance. These entries ensure that profitability, cash flow, and long-term sustainability are represented fairly.

Key reasons include:

• Reflect true value: Depreciation and amortization spread the cost of assets over their useful lives, showing the real cost of generating revenue
• Clarify cash flow: Net income only shows part of the picture. Non-cash expenses help reconcile net income with actual cash on hand.
• Comply with accounting standards: Accrual accounting requires matching costs with the revenue they generate
• Increase investor transparency: Recording these expenses helps stakeholders assess long-term stability and earnings potential

Income statements vs. cash flow statements

Non-cash expenses appear differently depending on the financial statement:

• Income statement: Recorded as operating expenses that reduce net income. For example, $5,000 of depreciation lowers reported profit, even though no cash left your account.
• Cash flow statement: Added back in the operating activities section, because they reduced net income but didn’t reduce cash. In the same $5,000 depreciation example, the expense is reversed during reconciliation to reflect actual cash flow.

This adjustment ensures that your cash flow statement shows true liquidity, not just accounting charges.

Non-cash expenses and tax deductions

Non-cash expenses can lower your taxable income, which in turn reduces your tax burden. Because depreciation and amortization are recorded over multiple periods, they spread that reduction in a way that aligns with how assets are used.

Here’s how it works in practice:

• When you record depreciation as a non-cash expense, you lower your net income for tax purposes without spending cash in that period
• If your business uses accrual accounting, you recognize these tax deductions even before cash is exchanged
• The tax benefit is limited by IRS rules—only assets and outlays qualifying under tax law can be deducted via depreciation or amortization

Why non-cash expenses matter

While they may seem like accounting smoke and mirrors, non-cash expenses directly influence how your business looks on paper, how investors view you, and how much tax you pay. Here’s why they matter:

Impact on profitability analysis

Non-cash expenses reduce your net income, which can make your business look less profitable than it really is. Analysts and investors often turn to EBITDA (earnings before interest, taxes, depreciation, and amortization) to strip out these charges. You can do the same to review your profitability with and without non-cash expenses for a clearer comparison.

Role in cash flow management

These expenses cut into reported profit but don’t reduce actual cash. That’s why you can show weak earnings yet still have strong operating cash flow. Paying attention to this difference helps you avoid overreacting to lower net income when your cash position is still solid.

Importance in investment decisions

Investors want to know whether your spending leads to lasting value. They adjust financials to separate accounting charges from cash activity. For example, depreciation reflects the cost of equipment you already purchased, not a hit to today’s liquidity.

Tax implications and benefits

Non-cash expenses like depreciation and amortization often qualify as tax deductions. By recording them, you reduce taxable income and keep more cash available to reinvest in the business. Planning around these deductions can improve both short-term cash flow and long-term strategy.

How they affect business valuation

Valuation models such as discounted cash flow (DCF) add non-cash charges back to net income to highlight true cash generation potential. The way you handle these expenses shapes how outsiders assess the value of your business and its assets.

Common types of non-cash expenses

Here is a list of non-cash expenses examples your business might account for:

Depreciation

Depreciation is the reduction in the value of a tangible asset due to usage or wear and tear. Buildings, machinery, vehicles, and office furniture all depreciate over time, and the expense is recorded on the income statement.

There are three main depreciation methods:

Straight-line method

The straight-line method of depreciation distributes the cost of an asset evenly across its useful life, resulting in a consistent yearly depreciation value.

Annual depreciation = (Asset cost – Salvage value) / Useful life

Example: A shipping truck that costs $80,000, with a $10,000 salvage price and five-year useful life, will depreciate by $14,000 each year.

Declining balance method

The declining balance method accelerates depreciation, recording larger expenses earlier in the asset’s life and smaller ones later. This increases deductions in the early years of ownership.

Depreciation = Book value * Rate

Example: An asset worth $10,000 with a 50% declining rate would depreciate $5,000 in the first year. In year two, the new book value of $5,000 would yield $2,500 depreciation.

Units of production method

The units of production method ties depreciation to usage instead of time, making it well-suited for machinery or equipment.

Depreciation = Units produced * (Asset cost – Salvage value) / Total estimated units of production

Example: A $50,000 machine with a $5,000 salvage value and 100,000-unit capacity depreciates at $0.45 per unit. Producing 20,000 units in the first year results in $9,000 depreciation.

Amortization

Amortization is the gradual recognition of the cost of an intangible asset over its useful life. Unlike depreciation, which applies to physical assets, amortization spreads out the expense of things like patents, software, or franchise rights.

Amortization expense = (Cost – Residual value) / Useful life

Example: If you purchase a patent for $10,000 with no residual value and a 10-year useful life, you would record $1,000 in amortization expense each year.

Common intangible assets that are amortized include:

• Patents
• Copyrights and trademarks
• Software development
• Franchise agreements
• Goodwill

Bad debt expense

Bad debt expense accounts for receivables you don’t expect to collect. Recording it ensures your financial statements show the true value of revenue rather than overstating income.

Two methods are commonly used:

• Allowance method: Estimate uncollectible accounts in advance. Debit bad debt expense and credit allowance for doubtful accounts (a contra-asset). This method is GAAP-preferred.
• Direct write-off method: Record the expense when it becomes certain a customer won’t pay. Debit bad debt expense and credit accounts receivable.

Example: If a customer owes $1,500 and goes out of business, you may need to recognize that loss immediately under the direct write-off method. Using the allowance method, you might instead estimate that 3% of your $50,000 receivables will be uncollectible and record a $1,500 bad debt expense.

Bad debt is particularly common in retail, banking, and telecom, where customer defaults are more frequent.

Asset impairment

Asset impairment occurs when the market value of an asset falls below its book value. Unlike depreciation, which is expected and planned, impairment reflects sudden events that reduce value, such as market downturns, regulatory changes, or natural disasters.

Common triggers for impairment include:

• Market decline
• Regulatory changes
• Poor financial performance
• Physical damage or obsolescence

Real-world examples:

• Exxon wrote down $17–20 billion in natural gas assets in 2020 amid an energy market downturn
• General Electric recorded a $22 billion goodwill impairment in 2018 after its Alstom acquisition underperformed
• Meta reported a $413 million impairment in 2022 to reduce office space and align with its long-term operating needs

Impairments are recorded as an expense on the income statement, reducing net income, and they lower the carrying value of the affected asset on the balance sheet.

Stock-based compensation (SBC)

Stock-based compensation gives employees equity instead of cash as part of their pay. It often takes the form of stock options, restricted stock units (RSUs), or employee stock purchase plans (ESPPs). Tech companies and startups rely on SBC to attract and retain talent while conserving cash.

Each type works a little differently, though they all qualify as non-cash expenses:

• Stock options: Employees get the right to buy company stock at a set strike price in the future. If the stock rises above that price, the option is “in the money” and employees can exercise it. If the stock falls below the strike price, the options expire worthless.
• RSUs: Restricted stock units are granted as part of a compensation package. Once they vest, employees own the shares outright and can sell them.
• ESPPs: Employee stock purchase plans let employees buy stock at a discount through payroll deductions, using after-tax income

SBC expense = Fair value of stock grant / Vesting period

Example: If an employee receives RSUs valued at $60,000 that vest over four years, you would record an SBC expense of $15,000 each year.

From an accounting perspective, SBC is recorded as an expense on the income statement and reduces net income, even though no cash leaves the company until employees exercise or sell their shares.

How to account for non-cash expenses

Even though non-cash expenses don’t involve cash leaving your business, they must be recorded to keep financial statements accurate. Below are basic journal entry examples:

Depreciation

Amortization

Bad debt expense (allowance method)

Asset impairment

Stock-based compensation

Impact on financial statements

When reconciling net income to cash flow using the indirect method, you add non-cash expenses back to net income, then adjust for changes in working capital accounts such as accounts receivable, inventory, and accounts payable. This ensures the cash flow statement reflects true liquidity rather than accounting allocations.

Modern accounting software can help automate this process with features such as:

• Journal entry templates
• Automatic depreciation and amortization schedules
• Asset tracking and management
• Custom reporting

How accounting software can help

Modern accounting software can help automate the process of recording non-cash expenses. When selecting a platform, look for these key features:

• Journal entry templates
• Automatic depreciation and amortization schedules
• Asset tracking and management
• Custom reports

Non-cash expenses in financial analysis

Non-cash expenses affect how your profitability, cash flow, and overall financial health are understood. Knowing where to find them and how to adjust for them can help you make smarter decisions.

On the income statement, non-cash expenses show up as reductions to net income. Look for line items like depreciation, amortization, or bad debt. On the cash flow statement, these charges are added back when reconciling net income to cash from operating activities.

Metrics such as EBITDA help analysts and business owners compare performance without the distortion of non-cash expenses. But be careful: making too many adjustments can also create a misleading financial picture.

What investors look for

Investors review non-cash expenses to assess whether your financial reporting is clear and sustainable. They often look for:

• Depreciation and amortization consistent with your asset base
• Transparent disclosures on stock-based compensation
• A clear reconciliation between GAAP and non-GAAP metrics

They also watch for red flags, including:

• Excessive non-cash expenses without explanation
• Aggressive write-downs or impairments
• Too many EBITDA adjustments
• Stock-based compensation that isn’t disclosed clearly

The bottom line: investors want consistency and transparency so they can evaluate whether your company is a strong long-term bet.

How Ramp simplifies tracking and managing non-cash expenses

Managing non-cash expenses like depreciation, amortization, and stock-based compensation can quickly become a headache for finance teams. These expenses don't involve actual cash outflows, but they still impact your financial statements and require meticulous tracking. Without proper systems in place, you're left manually calculating depreciation schedules in spreadsheets, struggling to allocate expenses correctly, and spending hours reconciling these entries each month.

Ramp transforms this complex process through automated expense management and intelligent categorization. When you record asset purchases, Ramp automatically tracks depreciation schedules based on the asset class and accounting method you've selected. Instead of maintaining separate spreadsheets for each asset, you can view all depreciation expenses in one centralized dashboard, with automatic monthly journal entries that sync directly to your accounting software. This eliminates the risk of missed entries or calculation errors that often plague manual processes.

For stock-based compensation and other recurring non-cash expenses, Ramp's automated workflows ensure consistent monthly recognition. You can set up rules to automatically categorize and allocate these expenses to the correct departments and cost centers, maintaining accuracy without manual intervention. The platform's real-time reporting provides instant visibility into how non-cash expenses affect your overall financial picture, making it easier to explain variances to stakeholders and make informed decisions.

By automating the most time-consuming aspects of non-cash expense management, Ramp frees your finance team to focus on strategic analysis rather than data entry. You'll close your books faster, reduce errors, and gain better insights into your true operating costs—all while maintaining complete audit trails for every non-cash transaction.

Save time and money with finance automation

Ramp connects seamlessly with major accounting, tax-filing, banking, and security software to allow for easy financial management and collaboration. Companies that use Ramp can look forward to fewer errors, less time spent on tedious accounting tasks, greater financial productivity, and overall employee satisfaction.

More than 40,000 businesses have saved $10 billion and 27.5 million hours with Ramp. Try an interactive demo and see why.