A non-operating income is a business term that is used in reference to the description of the part of the income accruing to a business that is not flowing from a steady source related to the usual functioning or activities of the business. That is to say that the money derived as a part of non-operating income is usually counted as so occasional as to be excluded from any calculations of the income generated by the company for the purposes of evaluating the performance of such a company within a stated period. Usually, companies carry out periodic assessments of their performance, including any sales they may have made or any income they may have derived from their various activities. During this calculation, companies will not include the funds that may have been derived from such activities grouped under the sources of non-operating income.
A way of illustrating the concept of non-operating income is to use the example of a company that manufactures light fixtures. Assuming such a company usually makes an average stated amount from the sale of the various units of its light fixtures, the funds generated from these sales are part of the content of the operating income of the company, simply because it is derived from the company’s main activities. If in the course of a financial period, such as a yearly business quarter, the same company sells a subsidiary located in another state, these funds will be added to the capital base of the company, but they will be counted as non-operating income since it is a rare event that is not the direct result of the company’s main operations of selling light fixtures.
This separation of the finances according to the determination of their sources is important because it helps in the avoidance of any confusion or wrong assessment of the performance of a company. Assuming the money derived from the sale of the subsidiary had been added to the calculations of the operating income of the company, this would erroneously give the impression that the company had done very well from the sale of light fixtures during the quarter under review when this is not the case. It would also suggest to potential investors that the company had performed exceptionally well during the period under consideration. Another reason this should be labeled as non-operating income is due to the fact that such funds will cause a sudden spike in the income of the company during the calculations for the period when it was derived, only for the company income to drop to its usual levels after the period has passed and the event does not repeat.
