Depreciation expense is the portion of a tangible asset’s cost allocated as an expense over its useful life due to wear and tear or obsolescence.
Primary Implication
The Depreciation Expense reported on the P&L Statement is intended to reflect the portion of the tangible assets that should be considered consumed in the current period. Most accountants will do this at year-end versus each month. This is an acceptable practice.
What’s more important is setting aside a portion of Depreciation Expense in a savings or money market account for necessary asset repair and replacement to keep your revenue-producing assets in full operation.
Overview
Depreciation Expense is an allowance made for wear and tear on an asset over its estimated useful life. Both Depreciation and Amortization expenses are non-cash expenses. They do not represent a cash outflow on the P&L Statement since you do not write a check for either of these costs of doing business. This is because the relevant cash outflow happened at the time the asset was purchased.
When reported on the P&L Statement, this expense will reduce Net Income. It should never represent the total amount of Depreciation and Amortization that is reported on the Balance Sheet. Accumulated Depreciation reported on the Balance Sheet is the accumulated or cumulative total amount of Depreciation that has been reported as Expensed on the P&L Statement.
The Balance Sheets Accumulated Depreciation amount is from the time the assets were acquired, until the date of the balance sheet. Depreciation represents the cost of capital assets used over time and is a contra-asset account that offsets the fixed asset account. Any time a depreciated asset is sold, the Accumulated Depreciation reported for that asset is removed from the Balance Sheet along with the reported asset value.
