Loss of Income: Is Depreciation a Continuing Expense?

USF&G deducted non-continuing expenses
such as water, gas, electric, repairs, maintenance, and garbage disposal from the RVI recovery. USF&G considered depreciation as a non-continuing expense and deducted the expense from Grevas’ recovery. The issue before the Illinois Supreme
Court was whether the depreciation on the building was properly deducted from RVI as a non-continuing expense. Depreciation is an accounting method used to allocate the cost of a tangible asset over the life of the asset. Depreciation doesn’t represent a cash transaction but instead is an accounting and tax function that is precipitated by book entries. Businesses must follow laws and regulations concerning when and how they can take depreciation deductions.

On the other hand, the company might sell a non-core business line, realizing a gain that temporarily boosts its bottom line. The Internal Revenue Service (IRS) allows businesses to deduct operating expenses if the business operates to earn profits. However, the IRS and most accounting principles distinguish between operating expenses and capital expenditures. When a company purchases an asset, instead of recognizing the entire cost of the asset as an expense in the year it’s purchased, the cost is spread out over the expected useful life of the asset.

Comparing CapEx vs OpEx for IT

It would be unwise to assume
the loss calculations would be the same for both provisions. This article examines how BI and RVI losses may treat depreciation after the damage or destruction of a fixed physical asset. Under the matching principle of accounting, the expense must be recognized in the same period as when the benefit (i.e. revenue) is earned.

The most common method used to calculate depreciation is straight-line depreciation where equal amounts of depreciation are deducted every year until the asset reaches its residual value. Accumulated depreciation is an asset account with a credit balance (also known as a contra asset account). It appears on the balance sheet as a reduction from the gross amount of fixed assets reported. In this 1992 Illinois Supreme Court case, Grevas lost his commercial building in a fire.

Corporate policy

All-in-one accounting software, Akounto, assists companies in analyzing accrued expenses by creating a separate account that records how much money the company owes and when the payments are due. Accumulated depreciation is usually not listed separately on the balance sheet, where long-term assets are shown at their carrying value, net of accumulated depreciation. Since this information is not available, it can be hard to analyze the amount of accumulated depreciation attached to a company’s assets. For example, factory machines that are used to produce a clothing company’s main product have attributable revenues and costs.

Depreciation cannot be charged on assets that are low in cost for the company. They can also not charge depreciation on assets that will be Is depreciation an operating expense? consumed within one accounting period of their purchase. Accumulated depreciation is a measure of the total wear on a company’s assets.

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

For example, interest payments may be listed separately from unusual or extraordinary non-operating expenses such as a one-time write-down of inventory or damage due to a natural disaster. A non-operating expense is a cost that isn’t directly related to core business operations. Examples of non-operating expenses are interest payments on debt, restructuring costs, inventory write-offs and payments to settle lawsuits. By recording non-operating expenses separately from operating expenses, stakeholders can get a clearer picture of company performance. So, you can see that depreciation is included as part of the operating expenses, reducing the operating income.

Depreciation expense is a significant consideration when it comes to calculating the value of an asset over its useful life. There are different methods of calculating depreciation expenses, each with its advantages and disadvantages. A noncash expense is an expense that is reported on the income statement of the current accounting period but there is no related cash payment during the period.

The Difference Between Revenue & Sales

Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for taxes. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes). Our post on “Cost of Goods Sold vs. Operating Expenses” will focus on the differences between the two types of costs, but we’ll start with the similarities. Notice that the bottom line is the same, it’s just the method of getting there that is different. Keeping in mind the pains of forecast and change, remember that the benefit of considering CapEx/OpEx for IT spending is about shifting money spending to better benefit overall business needs. Justifying a switch from CapEx to OpEx can also be difficult, as CIOs, CTOs, and the finance department appreciate the tax benefits of CapEx.

• USF&G considered depreciation as a non-continuing expense and deducted the expense from Grevas’ recovery.
• Operating expenses are costs that a company must make to perform its operating activities — the primary activities that generate revenue.
• The amount of depreciation needs to be calculated each year and is debited to Income Statement like any other operating expense.
• Cost of Goods Sold vs. Operating Expenses is that COGS are direct costs from selling products/services while OpEx refers to indirect costs.
• Depreciation is computed using various methods as a straight-line method, double declining method, units of production, and the sum of years digits method.

From this angle, there is a better view to identifying the relationship between cash flow and the amount of depreciation. Operating expenses are costs that a company must make to perform its operating activities — the primary activities that generate revenue. Non-operating expenses are costs that were not directly required for those activities.

Whether you consider depreciation as an operating or non-operating expense largely depends on your perspective and how you choose to categorize expenses within your business. However, regardless of how you classify it, understanding how depreciation works can help ensure accurate financial reporting and decision making for your organization’s procurement needs. Over time this could lead to lower asset values or require additional investment for replacement. Depreciation is one of the few expenses for which there is no outgoing cash flow.

Depreciation as an operating expense greatly impacts a company’s financial performance. It affects the business’s gross profit like any other indirect operating expense. Thus it is important to understand the classification and recording of depreciation as an expense.