Saturday, October 9, 2010

Depreciation reporting

Accounts, Bookkeeping and Payroll can be a burden to small business. This new series of blogs from Nottingham Accounting Solutions aims at making Accounts, Bookkeeping and Payroll a little clearer.

Depreciation reporting

In an accountant's reporting systems, depreciation of a business's fixed assets such as its buildings, equipment, computers, etc. is not recorded as a cash outlay. When an accountant measures profit on the accrual basis of accounting, he or she counts depreciation as an expense. Buildings, machinery, tools, vehicles and furniture all have a limited useful life. All fixed assets, except for actual land, have a limited lifetime of usefulness to a business. Depreciation is the method of accounting that allocates the total cost of fixed assets to each year of their use in helping the business generate revenue.

Part of the total sales revenue of a business includes the recovery of cost invested in its fixed assets. In a real sense a business sells some of its fixed assets in the sales prices that it charges it customers. For example, when you go to a grocery shop, a small portion of the price you pay for eggs or bread goes toward the cost of the buildings, the machinery, bread ovens, etc. Each reporting period, a business recoups part of the cost invested in its fixed assets.

It's not enough for the accountant to add back depreciation for the year to bottom-line profit. The changes in other assets, as well as the changes in liabilities, also affect cash flow from profit. The competent accountant will factor in all the changes that determine cash flow from profit.

Depreciation is only one of many adjustments to the net income of a business to determine profit from operating activities. Consideration of intangible assets is another expense that is recorded against a business's assets for year. It's different in that it doesn't require cash outlay in the year being charged with the expense. That occurred when the business invested in those tangible assets.

Nottingham Accounting Solutions Ltd offer accounts, bookkeeping and payroll services in the Nottingham and Mansfield area as well as Sage sales, set-up and 1 - to - 1 training on Sage accounts and Sage payroll. So why not take a look at