What Is Non-Operating Income? 3 Things You Need to Know

Non-operating income is the part of the business income that is clearly distinct from income derived from core business activities. It refers to the revenue and costs generated from sources other than business operations such as gains or losses from investments.

What this article covers:

• What Is Non-Operating Income?
• What Are Non-Operating Items on the Income Statement?
• What Is Not Included in Operating Income?

What Is Non-Operating Income?

Non-operating income is the profit or loss a business earns outside of its core operating activities.

Since the earnings are not expected to occur regularly or frequently, non-operating income is not used in the measurement of the business’ success. For example, if a business made a one-time sale of property, it would produce a non-operating income. Note that in accounting terms the income refers to both revenues as well as expenses.

Non-operating income, also known as peripheral or incidental income, include items such as

• Dividend income
• Gains and losses from investments
• Gains and losses from the sale of assets or investments
• Losses from asset impairment, write-offs, write-downs and restructuring
• Gains and losses on foreign exchange transactions
• Gains and losses due to discontinued operations
• Losses from lawsuits
• Changes in accounting principles
• Uninsured losses due to natural calamities

The income that is classified as non-operating depends on the business you’re in. For a non-financial business, the non-operating income that is earned through investing activities such as interest expense on debt securities will be reported as a non-operating item on the income statement.

However, for financial service companies, the interest income is typically reported as a component of operating activities.

What Are Non-Operating Items on the Income Statement?

The income statement of a business which typically covers a period of time, such as a quarter or a year, gives a snapshot of the company’s financial health. It summarizes the business revenues and expenses. This financial statement provides the bank, the investor or a potential buyer with important information about the profitability.

While preparing a company’s income statement, you should consider the effects of both operating and non-operating components.

The non-operating income is examined separately in the income statement. Non-operating income is often reported on the income statement after the subtotal Income from operations and will often appear with the caption Other income.

When income statements are prepared for daily business activities or generated for a short period of time, the non-operating income may be eliminated completely.

What Is Not Included in Operating Income?

The operating income is the profit the business earns after deducting operating expenses. It refers to the revenue and expenses resulting from the company’s core business and includes selling, general and administrative expenses.

Operating income excludes non-operating items such as investments in other businesses, taxes and interest payments.

Sometimes businesses mask their poor operational results by using non-operating expenses. This increases the apparent profit margins. Similarly, adding expenses that qualify as non-operating may reduce profit margins.

This is why the most common accounting approach is to exclude non-operating income from the income statements and recurrent profits. Companies with a higher level of non-operating income are regarded as having poorer earnings quality.

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