Department of accounts reporting system, depreciation of fixed assets of business such as building, equipment, computer etc. It is not recorded as cash expenditure. When an accountant measures profit based on the accrual basis of accounting, he or she counts depreciation expenses as an expense. Buildings, machinery, utensils, cars and furniture all have limited useful life. All fixed assets except real land have a limited lifespan of utility in business. Depreciation is an accounting method that assigns the total cost of fixed assets to each year of its use to help business generate revenue.
Some of the total sales of the business includes collection of costs invested in fixed assets. With real sense business sells part of fixed assets selling price to satisfy it. For example, when you go to a grocery store, the small part of the price you pay will go towards the cost of eggs or bread for buildings, machinery, bread ovens, etc. For each reporting period, business recoupe a part of the cost invested in its fixed assets.
It is not enough for the accountant to add back the annual depreciation to the bottom line profit. Changes in other assets and changes in liabilities also affect cash flows from profits. A competent accountant will take into account all changes that determine cash flows. Depreciation is one of many adjustments to the net profit of the business to determine the cash flow from operating activities. Amortization of intangible assets is another expense recorded for annual business assets. It differs in that it does not require cash expenditure in the year that it is claimed at cost. Business occurred when investing in those tangible assets.
Depreciation expenses
Depreciation is a term that we frequently hear, but I do not really understand it. But it is a necessary part of accounting. Depreciation is the expenses recorded at the same time as other accounts. Long-term investment assets that are not sold in the course of business are called fixed assets. Fixed assets include buildings, machinery, office equipment, vehicles, computers and other equipment. It can not be included in shelves, cabinets. Depreciation expenses widen the cost of fixed assets over the useful life of the business to the business rather than charging the entire cost to the expenses in the year the asset was purchased That way, the equipment and assets are used We will bear the share of the total cost every year. As an example, cars and trucks are usually amortized over five years. This idea is to charge a portion of the total cost for depreciation over the years, not the first year.
Depreciation applies only to fixed assets actually purchased and does not apply to assets to be leased or leased. Depreciation expenses are actual expenses, but it is not necessarily the cost of cash expenditure in the year that it is recorded. Cash expenditure actually occurs when fixed assets are acquired, but it is recorded over a certain period of time.
Depreciation expenses are different from other expenses. This is deducted from sales to determine profit, but the depreciation recorded in the reporting period does not require any real cash expenditure during that period. Depreciation expenses are the portion of the total cost of the fixed assets of the business that is assigned during the period to record the cost of using the asset during the period. The higher the total cost of the fixed assets of the business, the higher depreciation expense will be.
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