Updated July 18, 2023
Definition of Non-Operating Income
Non-Operating income is part of the indirect income derived from sources not directly related to the operations of the company. It includes dividend income, income from investments, interest income, etc., and it is to be shown separately in indirect incomes as non-operating incomes so that the reader of the income statement can get a clear understanding of the same.
Non-Operating Income is the type of Income that is not directly related to the business of the organization; hence it is also called indirect income. It forms part of the calculation of profit as though the income is not directly related to the business, but it is earned through the surplus invested from the business. Separating Non-Operating income from Operating income gives a clear picture and better understanding to the stakeholders as well as the readers of the financial statements on which they can take investment decisions. It is basically any profit or loss from the activities of the organization, which is not direct business activities like the sale of goods or providing of services. The nature of non-operating income differs as per the type of income, like income in the nature of interest; the dividend is recurring in nature, whereas income in the form of gain on foreign exchange is non-recurring in nature.
Formula for Non-Operating Income
The formula for the determination is as under:
Gross non-operating income is the income actually earned, say, income earned from the sale of securities invested in the share market from a surplus of business. Expenses related to earning income include say, interest on the loan paid for investing in securities, etc., and non-operating losses include loss on the sale of securities or loss on foreign exchange transactions, etc.
Examples of Non-Operating Income
ABC Ltd. earns a profit from its operating activities amounting to $ 500,000. the details about the non-operating activities are as under:
|Income from Dividend||$50,000|
|Income from Sale of Securities||$45,000|
|Loss on Foreign Exchange Transactions||$25,000|
|Interest Paid on loan taken for investing in securities||$12,500|
|Impairment of Assets||$80,000|
Calculate the total income of the organization
Calculation of Non-Operating Income
|Income from Sale of Securities||45,000.00|
|Loss on Foreign Exchange Transactions||(25,000.00)|
|Interest on Loan taken for non-operating investments||(12,500.00)|
|Impairment of assets||(80,000.00)|
Calculation of Total Income of the Organization
|Less: Net Non-operating Income||(22,500.00)|
What Includes the Non-Operating Income?
- Dividend Income: Dividend is earned on an investment in shares, and dividend income for the organizations whose core business is not dealing with an investment in securities.
- Gain/loss on investment: It is also part of the non-operating income for an organization whose core business is not an investment.
- Gain/loss on the Foreign Exchange Transactions: Gain/loss on foreign exchange transactions includes a loss on the sale of foreign investments due to currency fluctuations, and it is also forming part of non-operating income for organizations whose core business is not dealing in foreign exchange.
- Loss on Impairment of Asset: Impairment includes the permanent reduction in the value of the asset, which is to be treated as a non-operating loss as it is one-time in nature.
Importance of Non-Operating Income
- Non-Operating Income can contribute to the profit of the organization; with the non-operating income, the organization can improve the profits and attract investors.
- Non-operating income, if recurring in nature, like interest and dividends, can be treated as a safe income.
- The organization can invest in activities other than business and can earn income in the form of non-operating income.
- The bifurcation e from operating income gives a clear picture of the earnings from the sources, which helps the investors to take investment decisions.
- Safe income: non-operating recurring income is considered as a safe income i.e. it is the minimum income that the organization is able to earn
- Business Losses can be set off, which ultimately reduces the net loss.
- It contributes to the profits as well as the distribution of profit of the organization.
- Most of the non-operating losses are one-time in nature, and non-operating incomes are recurring in nature.
- Non-operating incomes can increase the tax burden of the organization.
- Non-operating income, if negative, can reduce the net income of the organization, which ultimately affects the performance of the organization.
- Non-operating income or losses are not related to the core business activities of the organization yet contribute to the profit or loss of the organization.
- Higher Non-operating income reflects defects in the operations of the organization.
- If Non-operating income is higher than the operating income, it creates doubt about the operations and the activities of the organization, and investors may not show interest in investing.
Non-operating income is that part of income that is derived from non-operational activities, and it includes dividend income, income or loss on foreign exchange transactions, impairment loss on the asset, interest income, etc. Non-operating income can be positive as well as negative. If it is positive, it contributes to profit, and more profits can be reflected in the income statement, whereas if it is negative, it decreases the profit of the organization and inversely affects the organization. Though it does not form part of core business activities, it forms part of profits. Higher non-operating income than operating income creates doubt about the operations of the organization and the purpose and activities of the organization.
This is a guide to Non-Operating Income. Here we also discuss the definition and importance along with its advantages and disadvantages. You may also have a look at the following articles to learn more –