According to Deppro Victoria, depreciation is generated over a period of time but not right away at the time of purchase. The owners of these assets charge depreciation expenditure against income every year from the depreciable life of assets. When the expenditure is charged it will have an impact on both balance sheet and income statement. Depreciation expenditure will add to accumulated depreciation on the balance sheet thus bringing down the book value of the organisation’s assets. Just like other expenses, depreciation expenditure brings down the bottom line profit on the income statement. And, it brings down the organisation’s tax liability.
Here are some vital points about depreciation:
What is the use of depreciation?
The depreciation expenditure will assist in realising an important principle in accrual accounting. Organisations specify the expenditures when they incur them. This permits the asset owners to apply yet another globally accepted accounting principle known as the matching concept. Matching implies when organisations specify profit earnings along with expenditures that bring them in similar tenure. Many investors in Australia make an investment in property as they get depreciation on investment property.
Organisations may experience various types of expenditures while running the business. All the expenditures finally shifted to the bottom line. In other words, the expenditures bring down profits. Meanwhile, they will not handle the purchase of a costly, durable capital asset as expenditure for a single period even if the organisation purchases it with a single cash expense. In its place, the asset may incur expenditure over a period of time as they diminish their value to the firm. In accrual accounting, the assets will incur expenditures as they wear and tear. Owners will come nearer to a reporting expenditure as they repay them by charging depreciation expenditure every year throughout assets’ tax depreciation life. Therefore, owners will get the tax advantages of paying for the asset over those years in lieu of all at once.
Depreciation on income tax and balance sheet
Depreciation specified on an income statement is the amount of depreciation expenditures that is suitable for the time highlighted in income statement heading. Meanwhile, a balance sheet is known as a statement of financial position as it offers a snapshot of the organisations’ assets and liabilities. The depreciation highlighted on the balance sheet is accumulated or the cumulative total amount of depreciation that was specified as depreciation expenditure in the income statement. It will include from the time the assets were purchased until the date of the balance sheet.
Depreciation on the income statement is meant for one period. You also need to find out the property value to calculate the depreciation that you may claim. Meanwhile, the depreciation on the balance sheet is cumulative for all the fixed assets still in possession of the organisation. The depreciation expenditure on an income statement is considerably below then the amount specified on the balance sheet. This is because the balance sheet amount will consist of depreciation for several years.