Why depreciation is considered as non-cash item ??

[umairansari]

Why depreciation is considered as non-cash item and comes under the heading of operating expenses in Income Statement?

[ibrishah]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by umairansari</i>
<br />Why depreciation is considered as non-cash item and comes under the heading of operating expenses in Income Statement?
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Hi there,

Depreciation is considered as non cash item for a simple reason. Look when u purchase some asset like plant cash outflows for the whole of cost is shown in the investing activities and therewhy you can not show cash outflows for the same thing twice i.e. one at time of purchase and the other when it is charged to income statement. The indirect format of cash flow statement requires to adjust all the non cash items charged to income statemet for appearing at actual cash flows from operations. I hope this answer your question.

[hmmm]

depreciation
first of ll you should know what is depreciation.
value of the asset grdually decrease it dosent remain same. but at the end when we sale the asset then their sale value will be lower then the purchase pric. so we recognise loss e.g 500 sale price purchase was 1000 loss which will be added in the income statement is 500. our profit for the year will be reduced by the 500.
is it right way?
we have use the assert for the last 3 years and it effect the profit only in 1 year. business also can not bear the loss at the same time
SO WE OPEN ACCOUNT DEPRECIATION
we enter calculate the value(by using formula) by which valu decrease in that year and by that amount proft of the year effect.

and at the time of sale the value of the loss which effect the profit will be lower.
e.g sale price 500
purchase price 1000
accumulated depreciation 200
loss for the year is (1000-500-200) is 300

[faisal_desperado]

Sorry for the interruption with regards to the respondents to the orignal post,
There have two questions been asked, i.e.
<b>Why depreciation is considered as non-cash item?</b>
Whenever Depreciation expense is claimed as an expense in the Statement of Comprehensive Income(Income Statement), it reduces profitability/operating profits/ EBIT, but it does not reduces cash outlay. (All other expenses reduce profit with a consistent change in cash , if, being paid in cash)
<b>Why depreciation expense comes under the heading of operating expenses in income statement ?</b>
It depends on the situation that under which head depreciation expense should be claimed;(Applying ABC Analysis)
If the Asset is specifically being used for production purpose then Depreciation with regards to that asset will be charged to Cost Of Production (COGS)
If Asset is used in/for administrative purpose then depreciation will be charged to admin. expense.

Differentiation of opinions with regards to different people is inevitable, however it does not mean that the intention is to discourage others.

Best Regards,