Why do we add depriciation as an expenditure in income statement when its a non-cash expense???



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Why do we add depriciation as an expenditure in income statement when its a non-cash expense???

2 Answer(s)


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Income statement has both cash and non cash expense. If you spend Rs.1 crore on buying equipment for your factory - this is a cash expense that has already been made. Now depreciation just gives you a method of splitting that cash expenses over a period of years instead of the same year. So though depreciation is a no-cash expenses in a specific time period, it was actually a cash expense in a previous time period and has to be expensed somehow. Otherwise such capital expenditure will never affect the profitability of a company and that would give investors an inaccurate view of the company

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Depreciation means that the value of the asset decreases over a period of time. Since it will be shown in the Balance Sheet, as being deducted from the value of the asset, the corresponding entry is shown in the Income Statement as an expenditure. It is the double-entry system of accounting.

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