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How Depreciation Reporting is done |
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Most of the businesses these days borrow money either in short terms or long terms basis. The majority of cash flow statements illustrate the increase and decrease of the earnings of the short term debt only. It does not report the total amount that are either borrowed or paid. |
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| Author: Heidee Mahinay |
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Depreciation is an accounting method that allocates the total cost of fixed assets to each year of their useful life in helping the business generate revenue. In an accountant’s recording system, profit is measured on the accrual basis of accounting, wherein depreciation is treated as an expense. All fixed assets, except for land, have a limited useful life.
To get a picture of depreciation in accounting perspective, it is treated as an expense that is recorded at the same time and period as with other accounts. Long-term operating assets of a business that are not held for sale in are known as fixed assets. These consist of buildings, plant and machinery, computers, furniture and fixtures, office equipment, vehicles and others.
In depreciation, the cost of a fixed asset is spread out over the years of its useful life, other than treating the entire cost as an expense in the year that it was bought. This is done so that the equipment carries a portion of the total cost for every year that it is used. For instance, an asset is depreciated over five years. To compute for its depreciable value, a fraction of the total cost is treated as part of depreciation expense for the whole five years, rather than just for the first year only.
A business may sell some of its fixed assets at a sale price that it usually charges its customers or clients. For instance, when you purchase items, say eggs or bread, at a grocery store, a small chunk of the price you pay for these items actually goes toward the cost of some of the business’ fixed assets. Each reporting period, a business recovers a part of the cost that was invested in its fixed assets. Simply put, recovery of cost invested in fixed assets becomes a part of the business’s total sales revenue.
Depreciation is just among one of the many adjustments made to a business’s net income to determine cash flow generated from its operating activities. In addition, amortization of intangible assets is treated as another expense that is recorded against a business's assets for a particular year.
Depreciation is different from amortization in the sense that in depreciation, a cash outlay is not necessarily required in the year that it was recorded. An accountant usually has to do more than just adding back depreciation for the year to bottom line profit, as there may be other factors such as changes in other assets and liabilities that can affect its cash flow. S/he must be very keen to details and zero in on all possible factors that may affect or determine cash flow from profit.
About Author
Benz Slow is a writer for http://www.the-dog-training-method.com and a trainer for dogs.
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