How does the depreciation of fixed assets affect the income statement?
May 4, 2023 | 40,00 EUR | answered by Fanni Ehrig
Dear tax advisor,
My name is Karl Peters and I am the owner of a small to medium-sized business. In recent years, my company has acquired a considerable amount of fixed assets, including machinery, vehicles, and office equipment. Now I am faced with the question of how the depreciation of these fixed assets will affect my profit and loss statement.
I have always recorded depreciation as an expense and assumed that it reduces the profit of my company. However, I have recently heard from various sources that depreciation can also have an impact on profit and does not necessarily have to result in a loss. This information has left me uncertain and I wonder if I have been recording depreciation incorrectly thus far.
That is why I am reaching out to you to seek clarity - how exactly does the depreciation of fixed assets affect the profit and loss statement? Does it actually influence the profit of my company, or are there ways to structure depreciation in a way that can even increase profit?
I would greatly appreciate it if you could provide me with possible solutions and explain how I should correctly record depreciation in my profit and loss statement to achieve the best possible result for my company.
Thank you in advance for your support.
Best regards,
Karl Peters
Dear Mr. Peters,
Thank you for your inquiry regarding the depreciation of fixed assets in your profit and loss statement. It is good that you are thinking about this issue, as the correct accounting of depreciation has a significant impact on the financial situation of your company.
In essence, depreciation is the systematic allocation of the purchase cost of long-term assets over their useful life. These depreciations are intended to reflect the decrease in value of the fixed assets over time. As such, depreciations are recorded as expenses in the profit and loss statement, which means they reduce the profit of your company.
However, it is important to understand that depreciations are not actual cash flows. This means that depreciations reduce profit on paper, but do not necessarily result in an actual loss. In many cases, depreciations can even lead to tax savings, as they decrease taxable profit.
There are also ways to structure depreciations in a way that can increase the profit of your company. For example, you can use different depreciation methods such as straight-line depreciation or declining balance depreciation to optimize taxable profit. It is important to consult with your tax advisor to choose the appropriate depreciation method for your company.
To correctly record depreciations in your profit and loss statement, you should ensure that you allocate the purchase cost of assets appropriately over their useful life. It is also important to comply with legal regulations regarding depreciation methods and rates to avoid potential tax consequences.
I hope this information helps you and provides clarity regarding the depreciation of fixed assets in your profit and loss statement. If you have any further questions, please feel free to contact me.
Sincerely,
Fanni Ehrig
