This video is about depreciation of fixed assets and how it impacts your Profit and Loss, Cash Flow Statement and Balance sheet. You’ll also see what happens with your financials when you sell a fixed asset.
Whether an item like a car is classified as a fixed asset or inventory depends on its business purpose.
Depreciation is a way of allocating the cost of an asset over its useful life. It is a non-cash expense in the Profit and Loss. It is eliminated from Net Profit in the Cash Flow Statement to derive Operating Cash Flow.
Accumulated Depreciation is the cumulative depreciation expense that decreases the net book value of the fixed asset.
When a fixed asset is sold, its net book value is the basis for calculating whether there is a profit or loss on the sale. This profit is not cash. It is the proceeds of sale of the fixed asset that is cash flow. Therefore, an adjustment is made to Net Profit in the Cash Flow Statement for the Profit or Loss on Sale of Fixed Assets.
Related video: http://www.youtube.com/watch?v=Xew8pxVtx_Q
This additional video provides further information about depreciation and impact on balance sheet, profit and loss and cash flow as well as the financing decisions of equipment purchase.