Non-cash Transactions Explained With Example

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.

Non cash transactions
Non-Cash Transactions
  • Does not involve cash
  •  An economic event
  • A business transaction
  • Includes Depreciation, stock issuance etc. 

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Example

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.

Explanation

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.

  1. 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.
  2. 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.
  3. 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.

Key Points

  • 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.

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Hira Aziz

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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