Admin expenses have been provided monthly over a six month period for a furnitur

Question

Admin expenses have been provided monthly over a six month period for a furniture company. These expenses include a depreciation amount. I am now compiling a budgeted income statement and am not sure if this amount of depreciation (six months x quite a large monthly amount!) should be included. I understand that accumulated depreciation is on a balance sheet and depreciation expenses are on an income statement. However, I just need to confirm that this type of depreciation (that is, included in with the admin expenses figure) is the type that goes on an income statement.

Explanation / Answer

Solution:

Depreciation expense is an accounting and financial reporting practice, used primarily by businesses that pay tax on income. On the income statement, depreciation expense appears as a charge against income, that is, it is subtracted from sales revenues to produce a lower reported income (lower profit, lower earnings).On the income statement, however, the expense is spread across the years of the asset's depreciable life. Depreciation expense thus lowers reported income across several years or more.

Generally, depreciation can be claimed for assets that (a) have a useful life of one year or more, (b) are used in a trade or business, and (c) which are used up, wear out, decay, become obsolete, or otherwise lose value over their useful life. Assets that meet these criteria may include factory machines, vehicles, computer systems, office furniture, aircraft, and buildings. Land, however, is an example of an asset that does not meet the third criterion (losing value), and therefore cannot be depreciated in the same way.

The country's tax laws sometimes give the accountants and financial officers some choice in deciding whether or not to classify some acquisitions as assets (and therefore eligible for claiming depreciation expense), although the freedom of choice is limited. In 2005, for example, several senior executives of Worldcom in the United States were convicted of fraudulent reporting for having overstepped the boundaries, for classifying services paid for by the company as assets rather than as expenses, as they should have been.

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