Dereciation as a Source of Fund
|Does depreciation generate actual cash flow in a company and if so how? |
|In: Business Accounting and Bookkeeping [Edit categories] |
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Answer
Depreciation does not generate cash flow. If a million dollar piece of equipment is purchased, an accountant would reflect that the company now owns a million dollar asset. Without depreciation, the company would still show a million dollar asset on the books even though we all know the equipment 's value is decreasing. As such, the company 's value would be overstated in the books.
I found this from Wikipedia, so I believe the above answer should be modified.
From Wikipedia - "Depreciation recognized for tax purposes will, however, affect the cash flow of the company, as tax depreciation will reduce taxable profits; there is generally no requirement that treatment of depreciation for tax and accounting purposes be identical. Where depreciation is shown on accounting statements, the figure usually does not relate to depreciation for tax purposes."
Answer-
The above answer is correct. This is an additional point.
Depreciation is a source of funds (not cash). Think about this - When you deduct depreciation from your profits, your net income figure gets reduced and if there is any distribution of cash which is based on net income, the amount of cash that is going out of the business will also be reduced. In that way, the company is able to retain part of its cash within the business that could have gone out, had the depreciation not been done.
Additional comment -
And even more to add regarding the taxes thing (at least in Canada). Depreciation is not an allowable expense for calculating taxable income. What happens is that you add the depreciation that you
|In: Business Accounting and Bookkeeping [Edit categories] |
[pic]CFA Designation
Certified Financial Accountant Designation www.socfa.org [pic]
[Improve] [pic]
Answer
Depreciation does not generate cash flow. If a million dollar piece of equipment is purchased, an accountant would reflect that the company now owns a million dollar asset. Without depreciation, the company would still show a million dollar asset on the books even though we all know the equipment 's value is decreasing. As such, the company 's value would be overstated in the books.
I found this from Wikipedia, so I believe the above answer should be modified.
From Wikipedia - "Depreciation recognized for tax purposes will, however, affect the cash flow of the company, as tax depreciation will reduce taxable profits; there is generally no requirement that treatment of depreciation for tax and accounting purposes be identical. Where depreciation is shown on accounting statements, the figure usually does not relate to depreciation for tax purposes."
Answer-
The above answer is correct. This is an additional point.
Depreciation is a source of funds (not cash). Think about this - When you deduct depreciation from your profits, your net income figure gets reduced and if there is any distribution of cash which is based on net income, the amount of cash that is going out of the business will also be reduced. In that way, the company is able to retain part of its cash within the business that could have gone out, had the depreciation not been done.
Additional comment -
And even more to add regarding the taxes thing (at least in Canada). Depreciation is not an allowable expense for calculating taxable income. What happens is that you add the depreciation that you