Non-operating income definition

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What is Non-Operating Income?

Non-operating income is any profit or loss generated by activities outside of the core operating activities of a business. The concept is used by outside analysts, who strip away the effects of these items in order to determine the profitability (if any) of a company's core operations. When a company experiences a sudden spike or decline in its reported income, this is likely to have been caused by non-operating income, since core earnings tend to be relatively stable over time.

Types of Non-Operating Income

There are several standard types of non-operating income that are reported by many organizations. They include the following:

  • Interest income. This is income earned from investments such as savings accounts, bonds, or other interest-bearing assets. It is not related to the company’s primary business operations but contributes to overall profitability.

  • Dividend income. Companies may earn dividends from shares they hold in other corporations. This income is considered non-operating because it comes from investment holdings rather than core business activities.

  • Gain on sale of assets. When a business sells a long-term asset like equipment or real estate for more than its book value, it records a gain. This gain is classified as non-operating since it results from a one-time event outside regular operations.

  • Foreign exchange gains. These gains occur when favorable currency exchange rate changes increase the value of international transactions or holdings. Such fluctuations are unpredictable and unrelated to the company’s operational performance.

  • Rental income. If a company rents out unused property or space, the payments it receives are considered rental income. Although it brings in revenue, it is not part of the company's main business unless it's in the real estate industry.

  • Lawsuit settlements or insurance proceeds. Occasionally, a company may receive income from legal settlements or insurance claims. These are considered non-operating because they are infrequent and not tied to the business’s usual revenue-generating activities.

Related AccountingTools Courses

The Income Statement

The Interpretation of Financial Statements

Timing of Non-Operating Income

Non-operating income is more likely to be a one-time event, such as a loss on asset impairment. However, some types of income, such as dividend income, are of a recurring nature, and yet are still considered to be part of non-operating income.

Fraudulent Use of Non-Operating Income

A business might attempt to use non-operating income to mask poor operational results. For example, the recipient of a round of funding could invest the cash and generate such a large amount of interest income that it is the largest part of total earnings reported; this is especially common for a startup business that has little operating income. Some less ethical organizations try to characterize their non-operating income as operating income in order to mislead investors about how well their core operations are functioning.

Presentation of Non-Operating Income

Non-operating income is itemized at the bottom of the income statement, after the operating profit line item. An example of this line item is highlighted in the following exhibit, which contains a complete income statement.