What Is Depreciation – How It Affects Profit And Cash Flow

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.

50 Comments

  1. Saeed Alhamli on December 7, 2020 at 9:33 pm

    In case of a company that is heavily leveraged (say 80%) where will the repayment of the loan would appear in the P&L statement? Above ebitda or below it?

  2. Adil masood on December 7, 2020 at 9:35 pm

    Losses must be added to net income to avoid double counting the loss. how?

  3. Vinojah Chandrawaran on December 7, 2020 at 9:35 pm

    This is amazing! – you explained this so well!

  4. Christin3 Sundaeee on December 7, 2020 at 9:35 pm

    Thank you so much I needed help for school and came across this!! I’m trying to $18250 depreciates 20% in one year I wasn’t given much of an example. I’m going to watch the video again I got this !!

  5. Abdul Wahab Latif on December 7, 2020 at 9:35 pm

    Thanks 🙂

  6. Ye Jin on December 7, 2020 at 9:37 pm

    This is my second time watching this video. Your explanation is the best on youtube and even better than my finance lecturer!

  7. Will Matthews on December 7, 2020 at 9:37 pm

    Is Net Book Value deprecation covered?

  8. Debra Taggart on December 7, 2020 at 9:38 pm

    Your method of instruction was perfect in helping understand this subject. Thank you.

  9. Anand Jage on December 7, 2020 at 9:38 pm

    Fantastic Lesson ! Crisp , Concise and Clear ! Thanks.

  10. Laura Sol on December 7, 2020 at 9:40 pm

    Absolutely Brilliant! thanks!

  11. Tony Kim on December 7, 2020 at 9:41 pm

    Thank you. It finally makes sense to me LOL…

  12. Aaliyah Kremzar on December 7, 2020 at 9:43 pm

    So amazing! I could only dream of being this great at accounting topics! Thank you for the wonderful lecture.

  13. ashok taru Saha on December 7, 2020 at 9:44 pm

    great one….

  14. ahmed fazal on December 7, 2020 at 9:45 pm

    One of the worst video on depreciation

  15. Marcus Rusti on December 7, 2020 at 9:45 pm

    I just use BizBox Fixed Assets from http://www.bizbox.co.nz especially the part where you choose the category and it brings up the best practice estimated useful life, rates. The month end process creates the journals automatically!

  16. Stan Marge on December 7, 2020 at 9:47 pm

    Thank you SO MUCH

  17. YearOfDFad on December 7, 2020 at 9:47 pm

    Thanks for the video. You’ve explained it better than my grad school professor! Liked and subscribed.

  18. zooz hamdan on December 7, 2020 at 9:48 pm

    I want a summary of this video

  19. Alanon SR3 on December 7, 2020 at 9:50 pm

    what assumptions of the trainee are made in creating this training? What are the basics I have to understand to understand this video? Thank you!

  20. kavita jangid on December 7, 2020 at 9:50 pm

    Is deprecation charge profitable to Organisation….???

  21. Sophear Khiev on December 7, 2020 at 9:52 pm

    wow so inspiring!

  22. ALABAMA AUTO FLIPPERS on December 7, 2020 at 9:55 pm

    Wow very good !

  23. Dina France on December 7, 2020 at 9:56 pm

    thanks so much, i am not an accountant and i did not know how to account for the sale of an asset.

  24. Ivet Vutova on December 7, 2020 at 9:57 pm

    Very helpful, thank you!

  25. Natasha S on December 7, 2020 at 9:59 pm

    So helpful!!

  26. John Maul on December 7, 2020 at 10:00 pm

    Really good explanations – with multiple scenarios for a full explanations. The pace was very quick, good for me but could see how it maybe too fast for others. Of course they could just rewind.

  27. Jay Daisuke on December 7, 2020 at 10:00 pm

    This is useful. Out of many videos I’ve searched, this one answer my thought
    of wondering why do we need depreciation. I understand that it is the reduction
    of asset’s value upon purchase and use, but I was having a wonder of why we need
    to do it. Turns out this video explained that depreciation is an imperative analysis
    that we must do in our finance and economy management. From what I’ve known,
    assets are broken down into two categories of analysis:

    1.Appreciation
    -"Investing" assets that have increasing value upon purchase over a period of time.

    2.Depreciation
    -"Expensing" on assets that have decreasing value upon purchase over a period of time.

    *Note:(We are "paying" regardless of the category, but I made it into two category
    for the purpose of understanding)

    In this case (which was explained in the video), we do depreciation in-order to ensure
    that we are able to cope the "expense" with the possible incomes the assets can "assist"
    to generate. We want to make sure that everything is "paid-off" at the end of the
    "depreciation time" which is known as "recovery period", and this is highly related
    with return of investment (ROI) (which is another different topic).

    Lastly, determining depreciation is possible using the following methods:
    1. Straight Line Method
    2. Declining Balance and Double Declining Balance Method (DB & DDB)
    3. Units of production…
    etc.

    I’m a final year Mechanical & Manufacturing Engineering undergrade student taking
    engineering economy and finance as my minor. Although several parts from the middle
    towards the end has some difficulty regarding the financial spreadsheet,
    this is really helpful. Thank you.

  28. Ye Jin on December 7, 2020 at 10:02 pm

    Very clear explanation. Very helpful

  29. Shibin p.p on December 7, 2020 at 10:04 pm

    Awesome

  30. Tc Chuah on December 7, 2020 at 10:05 pm

    Excellent lecture! Thank you!

  31. elene lortkipanidze on December 7, 2020 at 10:05 pm

    I have a specific question: if depreciation expense for the car used for commercial activities is allocated in the COGS ? thank you in advance

  32. Cindy Chen on December 7, 2020 at 10:06 pm

    Wow! Now I understand the big picture of depreciation in terms of cash flows. This should really help with my CPA exam. Thank you so much!

  33. Vincent Reardon on December 7, 2020 at 10:06 pm

    Brilliant video

  34. Sharon Neapollioun on December 7, 2020 at 10:06 pm

    Thank you for sharing this information. Its been some years since I took accounting and I was working on a project. I truly enjoyed the refresher course.

  35. Gideon Chew on December 7, 2020 at 10:10 pm

    Thanks for the explanation. Totally nailed it. Can I ask about how the assets affect the retained earnings and dividends?

    (in your scenario) At the end of the first year, you would have 5,000 in the bank: 4,000 net profit and 1,000 made back from the depreciation of the car.

    Is your retained earnings 5,000 or 4,000? – this affects the amount of dividends you can pay out. Would it be 4,000 or 5,000?

  36. Jimmy Moody on December 7, 2020 at 10:10 pm

    Brilliantly explained. Thank you.

  37. Pio Kantro on December 7, 2020 at 10:11 pm

    Thank you for clearly explaining the concept of depreciation with a workable example. It gave a lot of clarity to me having an engineering background. You’ve earned a sub and a like.

  38. MARTINET INT on December 7, 2020 at 10:11 pm

    i just want to clear you that, in 5 years of studies related to Accounting and finance, My concept about depreciation remains the same, Until i discovered this video and watch it 10 time to learn every single word you said.And perhaps My line manager "Under whom im working" told me one of the reason you got the Job is you have a Clear and Perfect concept about Depreciation….i watched this video couple of Days before my Interview.

    Thank You for sharing Your Knowledge online And help Thousands of people..
    May Lord bless you with More health and success,
    Amin.

  39. John_ Carter on December 7, 2020 at 10:12 pm

    ASIAN ARNOLD SCHWARZENEGGER!!!

  40. Zuhaib Khan on December 7, 2020 at 10:14 pm

    This is a very nice tutorial with proper finance charts, I am nowhere related to finance but I was easily able to understand every bit of it.

  41. nuyebga amadou on December 7, 2020 at 10:17 pm

    thank you

  42. Mohammed Muzibur on December 7, 2020 at 10:21 pm

    Very well presented..

  43. Akhil Gupta on December 7, 2020 at 10:22 pm

    I don’t understand a thing in this video. way beyond my understanding. Not uploader’s fault though. My background is engineering. maybe that’s why!

  44. Ravi Rao on December 7, 2020 at 10:22 pm

    Very clear and practical explanation of fixed assets and depreciation. Thank you!

  45. Alyson Dick on December 7, 2020 at 10:22 pm

    Just want to know if you are still making these videos – they’re fabulous. Thanks

  46. Wifuu on December 7, 2020 at 10:24 pm

    thank you so much, just took over the accounting and book keeping end of my families business with no real background in accounting, videos like these help me expand my understandings of cash flow and how to make our business more profitable. We just investing in proper accounting software after 30 years of being in business and its been a struggle to wrap my head around the principals of accounting. thank you for taking the time to explain these business practices to those of us who need it.

  47. woopyy Tv on December 7, 2020 at 10:26 pm

    Hello ma’am this is very useful ..

    Could you please respond my question .
    How can a company with a net loss show a positive cash flow?

    Please respond….

  48. Josephine Nguyen on December 7, 2020 at 10:31 pm

    You’re just AMAZING! Please keep on covering these financial subjects they are of substantial help to me. Could you please post a cover on Profitability Ratios (ROA/ROE…)? Thank you so much.

  49. kavita jangid on December 7, 2020 at 10:32 pm

    every company wants to show maximum expenses. sometimes show as a miscellaneous exp. to Receive Tax benefit…

  50. Toni Wetrich on December 7, 2020 at 10:32 pm

    I really appreciate this video! Very helpful!

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