Depreciation Reporting
In an accountant’s reporting systems, depreciation of a corporations fixed assets such as its buildings, equipment, computers, etc. is not recorded as a cash outlay. When an accountant measures income on the accrual core of accounting, he or she counts depreciation as an expense. Buildings, machinery, tools, vehicles and furniture all have a minimal useful life. All fixed assets, except for actual land, have a limited lifetime of usefulness to a business. Depreciation is the practice of accounting that allocates the overall cost of fixed assets to each year of their use in helping the corporation generate income.
Part of the overall sales income of a business includes recover of cost invested in its fixed assets. In a true sense a business sells a few of its fixed assets in the sales prices that it charges it patrons. For instance, when you go to a grocery store, a small portion of the price you pay for eggs or bread goes into the value of the buildings, the machinery, bread ovens, etc. Every reporting generation, a company recoups part of the worth invested in its fixed assets.
It is not sufficient for the accountant to add back depreciation for the year to bottom-line revenue. The changes in other assets, as well as the revisions in liabilities, also affect cash flow from revenue. The skilled accountant will factor in all the revisions that see cash flow from profit. Depreciation is only one of many adjustments to the net income of a corporation to determine cash flow from running activities. Amortization of intangible assets is another expense that is noted versus a corporations assets for year. It’s different in that it does not need cash outlay in the year being charged with the expense. That happened when the corporation invested in those tangible assets.
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