Wednesday, February 1, 2012

Is depreciation a source of funds

Depreciation means decrease in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accident. Depreciation is taken as an operating expenses while calculating funds from operation. The accounting entries are as follows-

i) Depreciation A/C Dr

To Fixed Assets A/C

ii) Profit & Loss A/C Dr

To Depreciation A/C

Both the profit & loss A/C and depreciation are non-current asset and depreciation is an non fund item. It is neither a source nor an application of funds. It is added back to the operating profits to find out funds from operation since it has all been charged to profit & loss a/c bur it does not decrease fund from operations. Depreciation should not therefore be taken as source of funds. If depreciation were really a source of fund by itself then any enterprise would have improved its position at will by merely increase the periodical depreciation charge.

Fund flow statement Vs Income statement

1) It deals with financial resources required for running the business activities. It explains how were they used.

1) It discloses the results of the business activities i.e. how much has been earned and how it has been spent.

2) It matches the fund raised and fund applied during a particular period. The sources and applications of fund may be of capital as well as revenue nature.

2) It matches the income of a period with the expenditure of that period which are both of a revenue nature. For examples when shares are issued for cash, it becomes a sources of fund while preparing a fund flow statement but it is not an item of income for an income statement.

3) Sources of fund are many besides opearations such as shares capital , debentures, sale of fixed assets.

3) It discloses the results of operations can not even accurately tell about the funds from operations alone because of non-funds items (such as depreciation, writing off fictitious assets etc being included there in.

Fund flow statement Vs Balance Sheet

1).It depicts the overall increase or decrease in working capital during a particular period.

1) shows the financial position of a business on a particular date

2) It incorporates the different sources and applications of funds during a period.

2) It incorporates all assets and liabilities on a particular date .

3) It depicts the changes that have taken place in the fixed assets and fixed liabilities, which have a bearing on the funds during a particular period.

It shows all assets and liabilities of a business on a particular date.

4) It is a dynamic statement since it focuses on those major transactions, which have been behind the balance sheet changes.

4) It is merely a statement of assets and liabilities on a particular date.


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