What is meant by non cash expense and how is depreciation a non-cash expense?


4 Answer(s)


As you said its a non-cash expense...there is no money involved in depreciation. it is just a method of realizing a non cash expense to reach a salvage/end value for a fixed asset after a period of time.

For eg....

You buy a CAR for Rs. 12 Lacs

You believe that you can use this car for 5 years and at the end of 5 years you can sell it for 2 lacs.

Now depreciation is the process of expensing the difference between the purchase price of 12 Lacs and the Salvage value of 2 Lacs over the life of the asset.

Purchase Price: 12 Lacs
Salvage Value: 2 Lacs
Useful Life: 5 Years
Value to be depretiated over 5 Years = 12 - 2 = 10 Lacs

Depreciation per year = 10 / 5 = 2 Lacs per year for five years. (Based on straight line depreciation)

Initial Value = 12 Lacs
Value at end of 1st year = 12 -2 = 10 Lacs
Value at end of 2nd year = 10 -2 = 8 Lacs
Value at end of 3rd year = 8 -2 = 6 Lacs
Value at end of 4th year = 6 -2 = 4 Lacs
Value at end of 5th year = 4 -2 = 2 Lacs

Basically these is no cash involved. Hope I have made sense....Mr. Binny could probably confirm if this is right.

Thanks for the excellent answer Suhas.
Atif - Hope this is clear now. I dont think I can add anything else here.

It's just an accounting convention to reflect the diminution of the value of an asset that is used over time - but we're not digging into our pockets to cover this loss of value. Eventually we will have to to replace the equipment, if we want to keep production running.

As per the matching concept of accounting , all the revenue of a financial year should be matched with the expenses / loss of that particular year to arrive at the true and fair profit / loss of that particular year. Asset has been used for generation of revenue so the reduction in the value of assets should be taken into consideration to match with the revenue of the year. That's why depreciation is charge as a non cash expenses.