Non-cash charges are an inevitable part of running a business. Although these charges do not involve a cash payment, they can affect the financial records of a business and its shareholders. Non-cash charges are typically expenses or write-downs that are recorded on a firm’s income statement, but don’t reduce cash flows or the amount of cash that’s available to shareholders or creditors.

The most common types of non-cash charges are depreciation, amortization, depletion, stock-based compensation, and asset impairments. Depreciation is the reduction in value of a long-term asset due to wear and tear over time. Amortization is similar to depreciation, but it applies to intangible assets like copyrights or software costs. Depletion is often used to spread the cost of depleting natural resources over the period of their extraction. Stock-based compensation is the grant of an equity-based award to an employee in lieu of a cash bonus. Lastly, asset impairments occur when the estimated fair value of a company’s asset is less than its book value.

These non-cash charges usually reduce earnings. However, these charges can be rearranged, deferred, or adjusted so that they can increase earnings when necessary. Non-cash charges are necessary for businesses that use the accrual basis accounting, as this method accounts for company costs regardless of whether cash is exchanged.

When making decisions about a business, it’s important to be aware of non-cash charges. By understanding these charges, investors can make informed decisions about whether a company is in good financial shape or not. Many firms record these charges regularly so they can separate non-cash on cash components, and investors can focus on core cash flow performance.

Overall, non-cash charges are an important expense that must be accounted for by businesses. Investors should pay special attention to non-cash charges when researching a business or making decisions about an investment. Understanding non-cash charges can help investors make informed decisions about their investments.