Depreciation plays a vital role in the business, especially where machinery is the income source. Such as factories where machines are required in bulk. A cash flow statement in QuickBooks is the statement of the cash inflow and outflow. The cash flow statement provides the actual movement of the cash coming in or out of the company using the cash basis of accounting.
Both income and cash flow statements are also similar, but they serve different purposes. An income statement provides the information on the profit of the business for a certain period of time, and a cash flow statement provides the information on the cash inflows or outflows from the company. Here in this blog, we will discuss about how does depreciation affect cash flow statement in quickBooks and why is it added back to the net income.
What Is Depreciation?
Depreciation is the decreasing value of the assets which is decreasing its rate by its day to day use. It is like a machine depreciating its value over time, the more you use a machine. For example, you have purchased a brand new coffee machine for $500 for your company, which is bright and shiny. You used it and it is loved by all the members of the company. Along with time, it will also accumulate some wear and tear, which will decrease its market value. The amount that is decreased from the actual rate is called the depreciated amount.
How Does Depreciation Affect The Income Statement?
Here we have described how depreciation affects the income statement:
- Depreciation as an expense: In the income statement, depreciation is marked as an expense under the operating expenses. Depreciation affects the income statement by reducing the business’s profit.
- Total expenses: As it is marked as an expense, it increases total expenses for the period in the income statement.
- Decreases the profit: Higher expenses result in lower net income. It does not include cash outflow, but it still reduces the accounting profit, which results in less profit in the income statement. It is the reason it is called a non-cash expense.
- Accurate view: Depreciation in the income statement helps to give us the view of the exact profit made by the company after removing the company’s machine depreciation value.
Why Depreciation Affect Cash Flow Statement in QuickBooks?
The depreciation decreases the profit in accounting, but it increases the cash flow. Given below that how does depreciation affect the cash flow statement in brief:
- Depreciation is not a cash expense, but it is still reduced by the net income on the income statement. It shows the percentage of fixed asset cost along with their life.
- Depreciation comes under the operating expense section of the income statement, and its starting point is the profit made by the company. But the depreciation has already reduced the profit without using cash, so it is added back to the net income.
- Depreciation is the reason behind the increase in operating cash flow, as depreciation reduces accounting profit.
Why is it Added Back To The Net Income?
Depreciation is added back to net income because it is not a cash expense. Depreciation reduced the company’s profit on the income statement, but it does not involve the outflow of cash. The cash flow statement concentrates on actual cash movements. As you know that we start with net income when calculating cash flow from operations. To convert net income into cash flow, we must remove the effects of non-cash items. Depreciation decreases net income, but we do not use cash, so we add it back to the net income in the cash flow statement. Adding it back ensures the cash flow statement reflects actual cash generated by operations.
Conclusion
Depreciation is the fall in value fixed asset and is counted as an expense, but it is not a cash expense. It decreases the profit just on the income statement, not in real-life cash, which also gives a benefit for the tax relaxation. This is the reason why the depreciation amount is always added back to the net income to show the true cash flow in QuickBooks from operations.