what effect does depreciation have on the profit and loss account and the balanc

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  1. profile image52
    Shoheb Shahposted 8 years ago

    what effect does depreciation have on the profit and loss account and the balance sheet?

    Please explain with examples.

  2. LIFE IS ABOUT profile image60
    LIFE IS ABOUTposted 8 years ago

    Simple answer it lowers your the value of your assets, lowering the profit margin.

  3. FREEWORKING profile image59
    FREEWORKINGposted 8 years ago

    depreciation decreases the profits as it is an expenses in the profit and loss account. in balance sheet it decreases the value of assets.
    like if the depreciation is 50000. your profit for the financial year will reduce by 50000 so as the value of assets in the balance sheet

  4. ckrishnaa profile image58
    ckrishnaaposted 7 years ago

    Providing depreciation means reducing the asset value by certain percentage every year without reducing the asset value at a time or reducing the profit of the company or a business at a time. While reducing the asset value by certain percentage expenditure or losses on assets by way of depreciation is incurred over many years.

  5. profile image50
    Urjeetposted 4 years ago

    Profit is simply all of a company's sales revenue and any other gains minus its expenses and any losses. A $3,000 depreciation expense, then, has the effect of reducing profit by $3,000. It's important to note, however, that "profit" is really just an accounting creation. With the truck in the previous example, your business spent the money upfront. All of the money was gone as soon as you bought the truck. But as far as your profit-and-loss calculations are concerned, you didn't really give up any value. Instead, you just traded $30,000 worth of cash for $30,000 worth of truck. As time passes and you "use up" that value by using the truck, you turn the cost into an expense through depreciation

    Impact In Cashflow
    If your business were accounting for the truck using cash accounting -- the method people use to balance their checkbooks -- you would have shown a $30,000 expense when you bought the truck and no expense at any time afterward. Under straight-line depreciation, you show no expense at the start, then $3,000 a year for 10 years. In each case, your overall profits decline by $30,000; it's just a matter of timing. The "real-world" effect is on cash flow. In both cases, you have a $30,000 outflow of cash at the beginning and no outflow afterward.

    Impact in Tax Accounting

    Though most companies use straight-line depreciation for their financial accounting, many use a different method for tax purposes. (This is perfectly legal and common.) When calculating their tax liability, they use an accelerated schedule that moves most of the depreciation to the earliest years of the asset's useful life. That produces a greater expense in those years, which means lower profits -- which, since businesses get taxed on their profits, means a lower tax bill in the earlier years.


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