USA Depreciation Expense on P&L Report

[Sully]

Is depreciation expense something that can be withheld from a p&l report, is it in any way proper to leave it off?

 

[LYAK]

Is depreciation expense something that can be withheld from a p&l report, is it in any way proper to leave it off?

The only way, in my opinion, to leave it off is if it is immaterial.

 

[Counterofbeans]

No.

Why would you want to anyways?

 

[Nora]

No, it is not right to leave it off. Why would you want to do that anyway? Depreciation expense reduces your reported income and thus reduces your tax expense, so it actually benefits you. Companies prefer to report a higher depreciation expense (through methods like double declining balance depreciation method) in the first few years of acquiring an asset to get tax savings.

 

[ColinCPA]

Is depreciation expense something that can be withheld from a p&l report, is it in any way proper to leave it off?

Depreciation that is not part of cost of goods sold is usually part of operating expenses. I guess you could simply omit the schedule of operating expenses from your financial statements.

 

[accounting_notes]

See Sully, You cant remove Depreciation Expense from P/L Account/Report. The reason being why you cant omit Depreciation Expense are as follows:

1. Your fixed/non-current assets contribute towards your sales (they manufacture product and then it is sold) so these assets should also contribute towards you cost of sales via Depreciation Expense to achieve matching concept.

2. Omitting Depreciation expense alone from the P/L Report only, would not tie the Balance Sheet.

3. Thirdly, you are overstating your profit which in return would lead to higher tax expense.

I hope these points clarify your concept!

 

[Counterofbeans]

Depreciation that is not part of cost of goods sold is usually part of operating expenses. I guess you could simply omit the schedule of operating expenses from your financial statements.

Why would you want to?

Depreciation is a very important expense that should almost always be considered

 

[Capital]

U can only omit depreciation of a particular asset(s) if its written off in d previous year

 

[The Finance Writer]

Well, Sully, you have all the accountants freaked out about omitting depreciation from the P&L. However, I do have instances where companies want to "leave it off." This is because management wants a P&L without the non-cash expense of depreciation. The monthly P&Ls of small businesses certainly leave off depreciation because they don't know the amounts. Your problem is recording depreciation that's eventually calculated at year-end.

To maintain accuracy of the balance sheet, you still need to account for accumulated depreciation... to offset the credit, just use Retained Earnings for the debit (instead of depreciation expense). However, this is not a good accounting practice. Instead, the company management simply needs a cash basis P&L along with the correctly prepared P&L that shows depreciation expense.

 

[Counterofbeans]

Well, Sully, you have all the accountants freaked out about omitting depreciation from the P&L. However, I do have instances where companies want to "leave it off." This is because management wants a P&L without the non-cash expense of depreciation.

That's EXACTLY the problem. These companies should re-examine why they want a P&L without deprecation expense (I'm not even going to say, "non-cash" here--that's a faulty description). If they want to project cash flows, that's a different document.

Referring to deprecation expense as being, "non-cash" is rubbish, nothing more than a Wall Street ruse. First of all, it completely sidesteps whether the fixed asset has been acquired via a note or capital lease, both of which completely nullify the idea of a, "non-cash" charge from minute one.

Along those lines, just think of how silly it is that you can have two parties do almost the exact same purchase, but one party opts for, say, FIVE 1 year leases and the other party just purchases a 5-year useful life asset outright, and their P&Ls would look significantly different; because the latter party, & deprecation expense, don't count because they're--wait for it--noncash! It's rubbish, of the highest order.

But let's say that the asset was paid for up front...

Want to know what that so-called, "non-cash" deprecation expense is really doing when you get right down to it? It's nothing more than the APPLICATION of cash to the P&L. The ONLY reason we have this issue is because such asset's life extends over multiple periods, that's it.

There's a reason why Warren Buffet & Berkshire Hathaway never buy a company when the managers talk about EBITDA...Interest, taxes, depreciation and amortization are ALL legitimate expenses and should always be considered. Note that I said considered and not, "the law." Well, there are certain exceptions, say, when a business combination takes place, but that is another story...

The monthly P&Ls of small businesses certainly leave off depreciation because they don't know the amounts. Your problem is recording depreciation that's eventually calculated at year-end.

This is true, but it's mostly because these smaller businesses are using accelerated depreciation methods to calculate depreciation and they don't know how to do it by themselves. Further, they don't want to worry about having a book-to-tax true-up issue. But it remains an issue nonetheless. The cash these businesses spend to purchase fixed assets is a legitimate reduction in the bank account and deprecation expense is the systematic method of applying such cash outlay into the P&L

To maintain accuracy of the balance sheet, you still need to account for accumulated depreciation... to offset the credit, just use Retained Earnings for the debit (instead of depreciation expense). However, this is not a good accounting practice. Instead, the company management simply needs a cash basis P&L along with the correctly prepared P&L that shows depreciation expense.

While these (smaller?) companies don't want to hear this, the better answer is to prepare a cash budget if that's what they want. Leaving out depreciation expense from the P&L is an enormous mistake in my humble opinion.

 

[The Finance Writer]

That's EXACTLY the problem. These companies should re-examine why they want a P&L without deprecation expense (I'm not even going to say, "non-cash" here--that's a faulty description). If they want to project cash flows, that's a different document.

Seems like you and I agree about the correct way to prepare a P&L. But that doesn't help Sully with the problem about omitting depreciation. My aim was to point out that this is only proper as a first step toward a cash basis analysis, which I suspect is Sully’s true underlying objective. Merely telling Sully to not ignore depreciation doesn't get at the root of the question, which you correctly characterize as an examination of why one would desire a P&L without depreciation.