Depreciation reporting

Depreciation reportingIn an accountant's reporting systems,depreciation of a business's fixed assets such asits buildings, equipment, computers, etc. is notrecorded as a cash outlay. When an accountantmeasures profit on the accrual basis ofaccounting, he or she counts depreciation as anexpense. Buildings, machinery, tools, vehiclesand furniture all have a limited useful life. Allfixed assets, except for actual land, have alimited lifetime of usefulness to a business.Depreciation is the method of accounting thatallocates the total cost of fixed assets to each

year of their use in helping the business generaterevenue.Part of the total sales revenue of a businessincludes recover of cost invested in its fixedassets. In a real sense a business sells some ofits fixed assets in the sales prices that itcharges it customers. For example, when you go toa grocery store, a small portion of the price youpay for eggs or bread goes toward the cost of thebuildings, the machinery, bread ovens, etc. Eachreporting period, a business recoups part of thecost invested in its fixed assets.It's not enough for the accountant to add backdepreciation for the year to bottom-line profit.The changes in other assets, as well as thechanges in liabilities, also affect cash flowfrom profit. The competent accountant will factorin all the changes that determine cash flow fromprofit. Depreciation is only one of manyadjustments to the net income of a business to

determine cash flow from operating activities.Amortization of intangible assets is anotherexpense that is recorded against a business'sassets for year. It's different in that it doesn'trequire cash outlay in the year being charged withthe expense. That occurred when the businessinvested in those tangible assets.