Question

What are the effect of depreciation on profit and loss account and balance sheet?

Answer 1

Explanation:

A depreciation expense has a direct effect on the profit that appears on a company's income statement. The larger the depreciation expense in a given year, the lower the company's reported net income – its profit. However, because depreciation is a non-cash expense, the expense doesn't change the company's cash flow.

Effect on Balance Sheet

When a company invests in depreciable assets such as machines and equipment, investors can expect to see an increase of assets on the balance sheet for that year. The following year, the asset is depreciated by the annual depreciation expense. In this example, the value of the asset is reduced by $3,000 which reduces the value of assets on the balance sheet by $3,000 and net income by $3,000.

Answer 2

The answer is shown below.

Explanation:

The depreciation expense shown in the debit side of the income statement. As it is an expense which reduces the net income

While in the balance sheet, the depreciation should be deducted from the long term assets which reduce the asset balance

Like:

Long term assets

Plant and Machinery                                    XXXXX

Less: Depreciation on plant & machinery  (XXXXX)

Net value of plant & machinery                   XXXXX

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