Subject: Cash Flow Clarification
I’ve noticed that my cash flow isn’t balancing due to the accumulated depreciation of a disposed asset.
To address this, I’ve considered reducing the depreciation expense for the year by the amount of that asset’s accumulated depreciation, which seems to balance things out.
Is this an appropriate approach, or is there something I might be overlooking?
One response
It sounds like you’re trying to reconcile your cash flow statement with the effects of disposed assets and their accumulated depreciation. Here are some points to consider:
Disposal of Assets: When you dispose of an asset, you remove its carrying amount from your balance sheet, which includes the original cost of the asset minus any accumulated depreciation. This transaction can affect both your income statement (due to potential gains or losses) and your cash flow statement.
Accumulated Depreciation: The accumulated depreciation on an asset does not directly impact your cash flow. It is an Accounting entry that reduces the book value of the asset. When you dispose of the asset, you should ensure that the accumulated depreciation is also removed from your books.
Cash Flow Statement Adjustments: If you reduce the depreciation expense in the current year to match the cash flow, this approach is not correct. The depreciation expense reflects the allocation of an asset’s cost over its useful life and is a non-cash expense. Simply adjusting depreciation won’t correctly represent your cash flows, and could lead to errors in financial reporting.
Correct Approach: To account for the disposal of an asset:
In summary, it would not be correct to balance cash flow by reducing the depreciation expense. Instead, ensure the disposals are accurately reflected in all relevant financial statements, and adjust cash flows accordingly when you dispose of assets. If you still have discrepancies after making these adjustments, it might be helpful to review your calculations or seek guidance from an Accounting professional.