Definition of Non-Operating Income
Non-Operating income is the part of indirect income which derived from sources not directly related with the operations of the company like 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 income statement can get the clear understanding about the same.
Non-Operating Income is the type of Income that is not directly related with the business of the organization hence it is also called as indirect income. Non-operating income forms part of the calculation of profit as though the income is not directly related to the business but it is earned through 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 the investment decisions. Non-operating income is basically any profit or loss from the activities of the organization which is not direct business activities like sale of goods or providing of service. 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 form of gain on foreign exchange is non-recurring in nature.
Formula for Non-Operating Income
The formula for the determination of Non-operating income is as under:
Gross non-operating income is the income actually earned say income earned from sale of securities invested in share market from a surplus of business. Expenses related to earning of income includes 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. The Net Non-Operating Income is to be reflected in the income statement.
Examples of Non-Operating Income
ABC Ltd. earns the 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?
Non-Operating Income includes the following:
- Dividend Income: Dividend is earned on an investment in shares and dividend income is non-operating income for the organizations whose core business is not dealing and investment in securities.
- Gain/loss on investment: Gain or loss is earned on revaluation or sales of investment it is also part of non-operating income for an organization whose core business is not an investment.
- Gain/loss on the Foreign Exchange Transactions: Gain/loss on the 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 asset which is to be treated as non-operating loss as it is one time in nature.
Importance of Non-Operating Income
The importance of non-operating income is described as under:
- Non-Operating Income can contribute in 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 dividend 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 of non-operating income from operating income gives a clear picture of the earnings from the sources which help the investors to take investment decisions.
Advantages of non-operating income are described as under:
- 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 against non-operating income which ultimately reduce the net loss.
- Non-operating income contributes in 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.
Disadvantages of non-operating income are described as under:
- 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 core business activities of the organization yet contribute in 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 the doubt on the operations and the activities of the organization and investors may not show interest in investing.
Non-operating income is that part of income which 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 non-operating income is positive it contributes in profit and more profits can be reflected in the income statement whereas if non-operating income is negative it decreases the profit of the organization and inversely affects the organization. Though non-operating income do not form part of core business activities it forms part of profits. Higher the non-operating income than operating income creates doubt about the operations of the organization and towards the purpose and activities of the organization. In a nutshell, non-operating income is good for the organization but it should be limited and should be less than the operating income so as to maintain the image in the market.
This is a guide to Non-Operating Income. Here we also discuss the definition and importance of non-operating income along with advantages and disadvantages. You may also have a look at the following articles to learn more –