What are the effects of depreciation?
The depreciation of assets such as equipment, buildings, furnishing, trucks, etc. causes a corporation’s asset amounts, net income, and stockholders’ equity to decrease. This occurs through an accounting adjusting entry in which the account Depreciation Expense is debited and the contra asset account Accumulated Depreciation is credited.
The amount of the annual depreciation that is reported on the financial statements is an estimate based on the asset’s 1) cost, 2) estimated salvage value, and 3) useful life. Depreciation should be thought of as an allocation of the asset’s cost to expense (and not as a valuation technique). In other words, the accountant is matching the cost of the asset to the periods in which revenues are generated from the asset.
The amount of the annual depreciation reported on the U.S. income tax return is based on the tax regulations. Since depreciation is a deductible expense for income tax purposes, the corporation’s taxable income (and associated tax payments) will be reduced by its tax depreciation expense. (In any one year, the depreciation expense for taxes will likely be different from the amount reported on the financial statements.)
It should be noted that depreciation is viewed as a noncash expense. That is, the corporation’s cash balance is not changed by the annual depreciation entry. (Often the corporation’s cash is reduced for the asset’s entire cost at the time the asset is acquired.)
Learn more about Depreciation.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
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why depreciation on income statement is not the same on the balance sheet?
Dear soliman ,
As i think depreciation expense in the income statment and accumulated depreciation in the balance sheet are always equal
It different because in Income Statement depreciation amount shown only related to that particular financial year, where as in balance sheet - amount shown is accumulated depreciation charged for its all years since asset start using.
Read the definition of Depreciation first.
In the Income statement depreciation is recorded as an expense, whereas in the balancesheet it is “Accumulated Depreciation” not Depreciation. In the income statement only a financial/accounting period’s depreciation is shown as an expense item, that reduces our profit. On the other hand, Accumulated depreciation in the balancesheet reduces our assests.
Also note that, Income statement is prepared for a particular period of time (a financial/Accounting period), but Balance Sheet is prepared on a particular date but it counts the entire project life.
Therefore, depreciation in the Income statement is an expense for a particular period of time (say 1 year), but Accumulated depreciation in the balance sheet is the summation of all the depreciation expense incurred throughout the project life.
can a depreciation expense be changed to retained earnings instead of net income?
depreciation cash effects?
what are the effects of depreciation expenses on income statement
DEPRECIATION EFFECTS
CAN DEPRECIATION EXPENSE BE CHANGED TO RETAINED EARNINGS INSTEAD OF NET INCOME