A company's leadership sets proper procedures to monitor all transactions and record them in a timely manner, whether the economic events involve cash or not. By tracking operating events closely, department heads and financial managers enable a company to record accurate transactional information and report it in accordance with regulatory guidelines.
A non-cash transaction is a contract, business affair or economic event in which a company doesn't dole out any sum of money. Accountants often call this type of transaction a "non-monetary transaction" or "non-cash item." Examples include depreciation, amortization and depletion. Depreciation is the periodic allocation of a tangible asset's cost to match revenue the resource produces. Tangible assets include equipment and computer hardware. Amortization is the depreciation equivalent for resources such as patents and trademarks, which accountants call "intangible assets." Depletion is a gradual reduction of land value and is a term common in extractive industries, such as mining, oil and gas.
Accounting entries differ for non-cash transactions, so you should pay attention to the underlying economic event to determine which entry applies. To record depreciation, debit the accumulated depreciation expense account and credit the accumulated depreciation account. The entry for amortization is as follows: debit the amortization expense account and credit the corresponding intangible resource account. To record depletion, debit the depletion expense account and credit the depletion allowance account. Obviously, all these entries don't involve the cash account. Any allowance account is a contra-account, meaning it reduces the value of the respective resource account.
Non-cash transactions, especially those related to a company's operating expenses, flow into a statement of profit and loss. This is what accountants call a report that shows corporate revenues, expenses and net income -- or net loss, if expenses exceed revenues. Given that non-monetary items decrease a company's income and taxes, accountants add them back to the net cash balance when they prepare a statement of cash flows. Also known as a liquidity report, a statement of cash flows displays three sections: operating, investing and financing activities. Financial managers incorporate non-cash transactions in operating cash flows.
The fact that a company doesn't pony up cash for some transactions doesn't change the operational ethos that permeates its day-to-day activities, especially with record-keeping and financial reporting. Operations managers diligently heed processes that revolve around non-monetary economic events to make sure employees follow company procedures and regulatory guidelines when executing tasks. For example, bookkeepers who record depreciation and amortization exercise the same care as record-keepers dealing with cash transactions. By doing so, bookkeepers enable a company to report accurate and complete operational data summaries that are in line with industry practices.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.