is depreciation an operating expense or not


Depreciation is added in operating expense, but Depreciation is an expensible item that does not actually cause a decrease in Cash Flow, so Depreciation is backed out of the Cash Spent calculations.
So does it mean that depreciation is just a journal entry and we do not have to open a bank a/c for depreciation amount collected every month. And if we do not collect depreciation amount every month till the life cycle of the asset, how will we Replace the Assets as after sometime an asset will be completely exhausted on account of use and new asset must then be purchased requiring a large sum of money. So if we have collected the depreciation amount, the same amount can be used to buy new asset.


asked Jun 5 '12 at 22:21
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1 Answer


Depreciation basically means the decrease in the value of an asset over time.

When you buy an asset, you trade cash for an object of equal value (at least as far as accounting for it goes), so it has no effect on your income. However, if the object is only expected to last 5 years before it MUST be replaced, then you can write off (depending on local taxation rules) 20% of the asset per year as an expense - a.k.a. depreciation.

As such, there is no actual cash transfer taking place to cover the depreciation - so no, you do not need a bank account for it. However, in your accounting system, you do need an "account" to place the depreciation in so that you can use it to offset your income.

If you were to set aside some money each year to save up for actually replacing the item, then you would be prudent regarding planning for the future, but it would not have any direct benefit to your company from an accounting point of view. When you spend the money on the replacement asset, you would merely convert some cash into a fixed asset, and then begin a new round of depreciation on that asset.

answered Jun 5 '12 at 23:04
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