Understanding Depreciation and Its Impact on Business

Depreciation, a visual guide: Depreciation is key in accounting. It shows how a fixed asset's value drops over time. This drop is due to wear, tear, and obsolescence. It's crucial for businesses with assets like machinery, buildings, vehicles, and equipment. In the cash flow statement, depreciation appears in the operating activities section. It's added back to net income as a non-cash expense. This step reduces taxable income without affecting actual cash flow. Businesses depreciate assets like machinery, buildings, vehicles, and computers. These items have limited useful lives. Depreciation spreads their cost over these periods. Several ratios help measure depreciation and its impact: 1. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗦𝗮𝗹𝗲𝘀 𝗥𝗮𝘁𝗶𝗼: Measures the proportion of sales used to cover depreciation. 2. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗙𝗶𝘅𝗲𝗱 𝗔𝘀𝘀𝗲𝘁𝘀 𝗥𝗮𝘁𝗶𝗼: Assesses the extent of depreciation relative to total fixed assets. 3. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗜𝗻𝗰𝗼𝗺𝗲 𝗥𝗮𝘁𝗶𝗼: Evaluates the impact of depreciation on operating profitability. 4. 𝗔𝗰𝗰𝘂𝗺𝘂𝗹𝗮𝘁𝗲𝗱 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗧𝗼𝘁𝗮𝗹 𝗔𝘀𝘀𝗲𝘁𝘀 𝗥𝗮𝘁𝗶𝗼: Indicates the proportion of asset value depreciated over time. Depreciation greatly affects investments. It lowers a company's profits, increases its taxes, and reduces asset values. Knowing how a company handles depreciation reveals its financial and operational health. https://einvestingforbeginners.kit.com/99e2f936ff