Question

What is depreciation and what does it do to cash flow?

Answer 1

Depreciation refers to the expense and reduction to the valu of the asset due to its use, wear and tear and obsolence. Depreciation is recorded every year in respect of assets in the accounting books based on it use and obolence. Their are varienty of methods of calculating depreciation

1. Straight Line Method

2. Double Declining Method

3. Sum of Digit Method

4. Unit of production

To record depreciation expense in the books of account following entry is passed

Particular Debit Credit

Depreciation expense xxxxx

Accumulated depreciation xxxxx

In the statement of cash flows, In case of indirect method depreciation expense is added back in operating activities section, because depreciation is non cash expense and in case of direct method depreciation expense is not considered as actuall in flow and outflow is considered.

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