Companies conduct various operations while running their business. Some operations are directly aimed at revenue generation while other operations are not related to the company’s main line of operations.

Such operations are called non-operating activities and revenue generated from them is called non-operating income. This can be called as an indirect source of income for companies.

What is non-operating income?

Also known as peripheral or incidental income, this income is derived from sources other than the core operations of the company. It includes dividend income, profit or loss from investment or sale of fixed assets, etc.

The results of non-operating activities are categorized under heads “Other revenue and gains” and “Other expenses and losses”. Non-operating income is popularly called “Other revenue and gains”.

Examples of Non-Operating Income and Gains are given below:

  • Interest received from marketable securities
  • Dividend income from investment
  • Rent received from letting premises
  • Gain on foreign exchange transactions
  • Gain due to discontinued operations
  • Gain from lawsuits
  • Gain due to change in accounting principles

Non-recurring events give rise to non-operating incomes or losses hence, they are reported on a company’s income statement. They are shown separately from normal earnings so that analysts and investors can see how the business performed over a specific period.

Non-operating income is immediately shown after income from operations in the income statement to clear the distinction between these two items.

Presentation of non-operating income in the income statement of the company:

Sinra Inc

Income statement

For the year ended December 31,2020

In the above income statement, we can see that non-operating expenses and non-operating income have been separately shown in the income statement.

  1. Most of the non-operating expenses and incomes are non-recurring.
  2. Non-operating and operating incomes are reported on separate lines in an income statement.
  3. Capital gains from the sale of assets form the part of non-recurring non-operating income
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Example:

Assuming after subtracting the cost of goods sold and all of the operating expenses from the sales revenue, a company reported an operating income of $1,500,000 for one year.

In addition to running its core business, the company also made some investments, which brought in $500,000 in dividends and $200,000 in interest income.

During the year, the company paid $600,000 interest for its previous financing year and sold a piece of land at a loss of $100,000 Also, it was sued and was charged for $150,000.

The company’s income from dividend, interest income and interest expenses are all non-operating gains or losses. Overall, the company incurred a net non-operating loss of $150,000 which is shown below.

Dividend Income$500,000
Interest income$200,000
Interest expenses$-600,000
Loss on sale of land$-150,000
Costs of litigation$-100,000
Non-operating income (loss)$(150,000)

Only dividend income and interest income are termed as non-operating income in the above case. We have set off against non-operating gains and expenses as well to get the resultant non-operating loss.

The classification of items as non-operating expense/income depends on the nature of business being carried out. For financial companies, interest income/expenses are treated as operating income/expenses while rest other companies treat it as operating income/expenses.

Non-operating income can be shown in the multi-step income statement:

EBIT is calculated by adding operating income with non-operating income. A positive non-operating income is reported when the total non-operating gains are greater than the non-operating losses. A negative non-operating income (loss) is reported if the non-operating losses exceed the total gains,

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Accounting Manipulation

The non-recurring nature of non-operating incomes provides scope for accounting manipulation. Non-operating income may be inflated to compensate for losses on operations. It can also account for incorrect operating income by including gains from unrelated activities.

A sudden increase in profit is more likely to be contributed by unrelated activities and can be non-operating.

Non-operating incomes and expenses are excluded from the calculation of Earnings Per Share (EPS) as not being part of the company’s normal course of operations. Non-recurring events can inflate/deflate the earnings of the company hence, depict the untrue financial position of the company.

Write-offs or write-downs may be considered non-operating expenses if they occur due to one-time sudden events like a natural disaster, the downturn of the economic conditions.