Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time. Suppose, a company namedRead more
Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time.
Suppose, a company named Johnson ltd. purchases machinery for 50,000 that has a useful life of 5 years with nil salvage value. Then the yearly depreciation to be charged can be calculated as:
Is Depreciation a Cash Flow?
Cash flows are inflows and outflows of cash and cash equivalents in an entity. The payments made by the entity denote the outflows whereas the revenues or incomes of the entity denote the inflows. Talking about cash flows, depreciation is a non-cash item of expense which means it neither results in inflow nor outflow of cash resources.
In the adjacent Profit and Loss statement, a cash payment of 7,000 for electricity implies outflow of cash however, depreciation of 10,000 is merely an imputed cost to write off an asset or we can say, a part of profits set aside each year so that there are sufficient funds available to procure a new asset after the currently available asset is discarded.
However, cash flow statements are affected by depreciation. Depreciation is added back to the net profits while calculating cash flows from operating expenses since it is a non-cash item and has been deducted while calculating net profits in the profit and loss statement.
Depreciation does not directly impact the amount of cash generated or expended by a business but it is tax-deductible and will reduce the cash outflows related to income taxes. Thus, depreciation affects cash flow by reducing the amount of cash a business has to pay for income taxes.
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short. CWIP is the work which is not yet completed but the amount for which has already been paid. Suppose, at the time of preparing a balance sheet, ifRead more
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short.
CWIP is the work which is not yet completed but the amount for which has already been paid.
Suppose, at the time of preparing a balance sheet, if an asset is not completed, all the costs incurred on that asset up to the balance sheet date are to be transferred to an account called capital work in progress.
Example 1: A machinery under installation.
There are several expenses incurred while installing machinery, expenses such as labor charges, Initial delivery and handling costs, Assembly and installation cost, etc are included in CWIP and when the asset is completed and is ready to use, all the costs are transferred to the relevant accounts.
To make it simpler, let me show journal entries relating to this example.
When an expense is incurred/paid:
When an asset is complete and put to use:
Example 2: A Contractor is constructing a building. The following expenditures are being incurred to date:
i) Raw materials – 5,00,000
ii) Payment to Architect – 3,50,000
iii) Advance for Equipments – 1,50,000
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets are ready to use:
Disclosure in the Balance sheet
CWIP account is shown separately in the balance sheet below the fixed asset.
we cannot depreciate capital work in progress. It can only be depreciated when the asset is put to use.
Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more
Let us first understand what working capital is.
Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.
It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.
Sources of Working Capital
Any transaction that increases the amount of working capital for a company is a source of working capital.
Suppose, Amazon sells its goods for $1,000 when the cost is only $700. Then, the difference of $300 is the source of working capital as the increase in cash is greater than the decrease in inventory.
Sources of working capital can be classified as follows:
Short Term Sources
Trade credit: Credit given by one business firm to the other arising from credit sales. It is a spontaneous source of finance representing credit extended by the supplier of goods and services.
Bills/Note payable: The purchaser gives a written promise to pay the amount of bill or invoice either on-demand or at a fixed future date to the seller or the bearer of the note.
Accrued expenses: It refers to the services availed by the firm, but the payment for which is yet to be done. It represents an interest-free source of finance.
Tax/Dividend provisions: It is a provision made out of current profits to meet the tax/dividend obligation. The time gap between provision made and payment of actual payment serves as a source of short-term finance during the intermediate period.
Cash Credit/Overdraft: Under this arrangement, the bank specifies a pre-determined limit for borrowings. The borrower can withdraw as required up to the specified limits.
Public deposit: These are unsecured deposits invited by the company from the public for a period of six months to 3 years.
Bills discounting: It refers to an activity wherein a discounted amount is released by the bank to the seller on purchase of the bill drawn by the borrower on their customers.
Short term loans: These loans are granted for a period of less than a year to fulfil a short term liquidity crunch.
Inter-corporate loans/deposits: Organizations having surplus funds invest with other organizations for up to six months at rates higher than that of banks.
Commercial paper: These are short term unsecured promissory notes sold at discount and redeemed at face value. These are issued for periods ranging from 7 to 360 days.
Debt factoring: It is an arrangement between the firm (the client) and a financial institution (the factor) whereby the factor collects dues of his client for a certain fee. In other words, the factor purchases its client’s trade debts at a discount.
Long Term Sources
Retained profits: These are profits earned by a business in a financial year and set aside for further usage and investments.
Share Capital: It is the money invested by the shareholders in the company via purchase of shares floated by the company in the market.
Long term loans: These loans are disbursed for a period greater than 1 year to the borrower in his account in cash. Interest is charged on the full amount irrespective of the amount in use. These shareholders receive annual dividends against the money invested.
Debentures: These are issued by companies to obtain funds from the public in form of debt. They are not backed by any collateral but carry a fixed rate of interest to be paid by the company to the debenture holders.
Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.
No, Land is not a Current asset. Current Assets are assets that are expected to provide benefit to the company and convert into cash within one year. These help entities maintain liquidity. In short, we can say these Short term assets help in the day-to-day operations of an entity. Some common exampRead more
No, Land is not a Current asset.
Current Assets are assets that are expected to provide benefit to the company and convert into cash within one year. These help entities maintain liquidity.
In short, we can say these Short term assets help in the day-to-day operations of an entity.
Some common examples are Debtors, Inventory and Cash as they are liquid in nature.
Land as a Current Asset
Land is not a current asset but a fixed asset which is shown under the head Non-Current assets in the Balance sheet. Such assets are not sold or consumed by the entity but are held to produce goods and services.
The full value of such assets will not be realized within one year; hence such assets are useful in the long run. The part of the value of these assets realized in one accounting year is charged as depreciation in the Profit and Loss Account. Such depreciation charged reduces the book value of the assets in the Balance sheet. Depreciation can be calculated as:
Other examples of non-current assets are Machinery, Plant, furniture, etc.
Land is presented in the Balance sheet as;
Also, I would like to add that land is an exception to the concept of depreciation because it does not have a definite useful life so there is no way to depreciate it. Land is considered to have an indefinite life span. Unlike other non-current assets, the value of land tends to increase over time.
Therefore, unless land is used for extraction purposes (i.e. for Mining, etc), charging depreciation on land is prohibited.
Is depreciation a cash flow?
Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time. Suppose, a company namedRead more
Depreciation refers to that portion of the value of an asset that a company uses in an accounting year to generate revenue. Assets are written off in form of depreciation over time also called the useful life of the asset. It denotes the wear and tear of an asset over time.
Suppose, a company named Johnson ltd. purchases machinery for 50,000 that has a useful life of 5 years with nil salvage value. Then the yearly depreciation to be charged can be calculated as:
Is Depreciation a Cash Flow?
Cash flows are inflows and outflows of cash and cash equivalents in an entity. The payments made by the entity denote the outflows whereas the revenues or incomes of the entity denote the inflows. Talking about cash flows, depreciation is a non-cash item of expense which means it neither results in inflow nor outflow of cash resources.
In the adjacent Profit and Loss statement, a cash payment of 7,000 for electricity implies outflow of cash however, depreciation of 10,000 is merely an imputed cost to write off an asset or we can say, a part of profits set aside each year so that there are sufficient funds available to procure a new asset after the currently available asset is discarded.
However, cash flow statements are affected by depreciation. Depreciation is added back to the net profits while calculating cash flows from operating expenses since it is a non-cash item and has been deducted while calculating net profits in the profit and loss statement.
Depreciation does not directly impact the amount of cash generated or expended by a business but it is tax-deductible and will reduce the cash outflows related to income taxes. Thus, depreciation affects cash flow by reducing the amount of cash a business has to pay for income taxes.
See lessWhat is capital work-in-progress?
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short. CWIP is the work which is not yet completed but the amount for which has already been paid. Suppose, at the time of preparing a balance sheet, ifRead more
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short.
CWIP is the work which is not yet completed but the amount for which has already been paid.
Suppose, at the time of preparing a balance sheet, if an asset is not completed, all the costs incurred on that asset up to the balance sheet date are to be transferred to an account called capital work in progress.
Example 1: A machinery under installation.
There are several expenses incurred while installing machinery, expenses such as labor charges, Initial delivery and handling costs, Assembly and installation cost, etc are included in CWIP and when the asset is completed and is ready to use, all the costs are transferred to the relevant accounts.
To make it simpler, let me show journal entries relating to this example.
When an expense is incurred/paid:
When an asset is complete and put to use:
Example 2: A Contractor is constructing a building. The following expenditures are being incurred to date:
i) Raw materials – 5,00,000
ii) Payment to Architect – 3,50,000
iii) Advance for Equipments – 1,50,000
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets are ready to use:
Disclosure in the Balance sheet
CWIP account is shown separately in the balance sheet below the fixed asset.
we cannot depreciate capital work in progress. It can only be depreciated when the asset is put to use.
See lessWhat are the sources of working capital?
Let us first understand what working capital is. Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern. It also represents the exceRead more
Let us first understand what working capital is.
Working capital means the funds available for the day-to-day operations of an enterprise. It is a measure of a company’s liquidity and short term financial health. They are cash or mere cash resources of a business concern.
It also represents the excess of current assets, such as cash, accounts receivable and inventories, over current liabilities, such as accounts payable and bank overdraft.
Sources of Working Capital
Any transaction that increases the amount of working capital for a company is a source of working capital.
Suppose, Amazon sells its goods for $1,000 when the cost is only $700. Then, the difference of $300 is the source of working capital as the increase in cash is greater than the decrease in inventory.
Sources of working capital can be classified as follows:
Short Term Sources
Long Term Sources
Another point I would like to add is that, although depreciation is recorded in expense and fixed assets accounts and does not affect working capital, it still needs to be accounted for when calculating working capital.
See lessIs Land a Current Asset?
No, Land is not a Current asset. Current Assets are assets that are expected to provide benefit to the company and convert into cash within one year. These help entities maintain liquidity. In short, we can say these Short term assets help in the day-to-day operations of an entity. Some common exampRead more
No, Land is not a Current asset.
Current Assets are assets that are expected to provide benefit to the company and convert into cash within one year. These help entities maintain liquidity.
In short, we can say these Short term assets help in the day-to-day operations of an entity.
Some common examples are Debtors, Inventory and Cash as they are liquid in nature.
Land as a Current Asset
Land is not a current asset but a fixed asset which is shown under the head Non-Current assets in the Balance sheet. Such assets are not sold or consumed by the entity but are held to produce goods and services.
The full value of such assets will not be realized within one year; hence such assets are useful in the long run. The part of the value of these assets realized in one accounting year is charged as depreciation in the Profit and Loss Account. Such depreciation charged reduces the book value of the assets in the Balance sheet. Depreciation can be calculated as:
Other examples of non-current assets are Machinery, Plant, furniture, etc.
Land is presented in the Balance sheet as;
Also, I would like to add that land is an exception to the concept of depreciation because it does not have a definite useful life so there is no way to depreciate it. Land is considered to have an indefinite life span. Unlike other non-current assets, the value of land tends to increase over time.
Therefore, unless land is used for extraction purposes (i.e. for Mining, etc), charging depreciation on land is prohibited.
See less