Puzzled! What is non-cash transaction? This article helps you to understand the basic concept of non-cash transaction, what is it? What type of transactions lies in this type?
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What Is Non-Cash Transaction?
A business transaction (selling or buying a thing) that does not involve cash is called non-cash transaction. It is an economic event that occurs when a company do a financing related transactions without being cash engaged into it. In these types of transactions, sometimes the company writes a promissory note instead of using cash.
- Does not involve cash
- An economic event
- A business transaction
- Includes Depreciation, stock issuance etc.
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According to GASB (Governmental Accounting Standard Board) 9, paragraph 37, the following are the examples of non-cash transactions:
- Purchase of asset (property, plant or equipment) by issuing stock convertible bonds
- Exchange of one property for other property
- Increase or decrease in the fair market value of investments
- Expire debt in exchange of issuing additional debt.
- Purchase of an asset by having capital lease contract.
- Expire debt in exchange of selling a fixed asset.
Non-cash transactions- the term in itself is quite indicative that it is the opposite of cash transaction. In business there are numerous number of transactions. In which there may not be a movement in terms of cash or May the movement takes place in later time or no movement at all. So, to give a more accurate picture to their current financial condition, non-cash transaction effects are also added.
- Purchase of asset by issuing stock convertible bonds. In other words, instead of converting bonds into cash and then buying assets. A company buys an asset through issuing bonds. For example, purchase of land and building through issuance of 250,000 shares of common bond.
- Exchange of one property for other property: In this type, instead of selling a property and then purchasing a property. The company exchange its property with another property. For instance, Exchange land in California, for land in Sydney.
- Depreciation: Depreciation is recorded on a fixed asset to calculate the reduction in the value of asset over a time. Depreciation is considered as non-cash expense. When a company buys a fixed asset it is recorded in the company’s balance sheet. Every year the value of fixed asset is reduced because it is being used. But this expense is non-cash because company does not pay for it. For instance, a company bought computer for 100,000, its useful life is 3 years and it will be depreciated by 33%. Company doesn’t has to pay for this expense, rather it reduces the value of asset.
Cash Transaction vs Non-Cash Transaction
In cash transactions immediate payment is made and cash is exchanged. While the prior one does not involve cash nor the cash is exchanged. These are some of the significant non-cash activities they are usually reported at the bottom of the statement of cash flows, to provide significant information. Another way of presenting it can be a note in the financial statement.
- Noncash transactions does not involve cash in it.
- Cash transactions are immediate payments and involve cash.
- Non cash transactions include depreciation, exchange of property from other property or issue stocks for purchasing of an item.
Hira Aziz - Author
She is a Business Content writer and Management contributor at 12Manage.com, where she contributes a business article weekly. She has over 2 years of experience in writing about accounting, finance, and business.
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