Business Analysis with Microsoft® Excel, Second Edition

Depreciating Assets

Depreciation, in accordance with the accrual principle, influences the timing of your company's earnings by matching revenues and costs. It is the means by which a company can spread the cost of an asset over its expected useful life. In other words, depreciation is the allocation of prior expenditures to future time periods, so as to match revenues and expenses.

Typically, you make the cash outlay to purchase an asset during the first year of the asset's useful life. The cash outlay itself is not reflected in the depreciation line of an income statement. Depreciation does not represent a cash outlay: it is a non-cash charge that you use to match the first year's expenditure with the subsequent flow of revenue.

Suppose that ...