Relation About Expenses, Asset and Depreciation.

In general expenditure, assets and depreciation those items seem very simple but sometimes it makes confuse to understand even expertise of these fields because when we calculate GDP on the income basis that time we should add depreciation on profit so people starting to confuse over there why depreciation should add on profit even it is expenses and some students of economics and business getting more confused about depreciation expenses that’s why I would like to make clear about it by giving simple explanation with example. 

 

For example, there is a one-person called Ram, he has started one small business selling vegetable by carrying motorbike around the village. To run his business, he has bought one bike, which cost is euro 1000. He has sold vegetable in one financial year euro 2000 and the same period he has bought vegetable total cost 1300 euro and fuel and repairing cost 200 euro. After one year he should submit financial details in tax office so that profit or loss must be calculated in a business. Here total sale is 2000 euro and total expenses are 1500 euro, it seems 500-euro profit but what about motorbike condition, after running one year obviously its value must be decreased a little bit, so we should address decrease value of motorbike otherwise our calculation of profit would be wrong. But how much decrease its value in one year, some assets may decrease more value in one year like a computer, some assets may decrease less value in one year like building. To solve this kind of problem, the government of every country has fixed rule for every asset for depreciation percentage in a year like in Nepal 5% depreciation should be charged in a building. Assumed here we have 10% depreciation charge on a motorbike. After that depreciation cost would be 100 euro of motorbike. Here we should know that after buying something for business use or selling purpose some items would be finished after using or selling those items called expenses like fuel and purchase of vegetable are expenses here. But motorbike is still there not finish even using one year that’s why it is called assets. In the same time value of motorbike has been decreased by 100 euro that’s why it is an expense, called depreciation. If we have 5 litter fuel and 10 kg vegetable at the end of the closing day those are also assets of a business called closing stock. But in this business, there is no closing stock at the end of the closing day. Now we have total income 2000 euro and total expenses 1600 euro equal to 400-euro profit. Then we have to pay tax on the basis of the total profit of 400 euro. If we don’t address depreciation then our profit would be 500 euro so the tax would be paid on the basis of 500 euro. which is lost of business because the value of motorbike has been lost by using one year.

 

So, we can say that depreciation is the expenses part of fixed assets for a particular year. Most confusion matter of depreciation is that it is noncash expenses means when we have to buy fuel, we should pay to an outside party by cash or we should pay later. But in the case of depreciation expenses, we should not pay cash or pay later because we have already paid or addressed when we have bought a motorbike. That’s why everybody gets confused here to understand about depreciation expenses. If we don’t address it on expenses, we should pay more tax, we must address to reduce tax but it is not cash expenses. Depreciation expenses don’t affect to cash.

 

So finally, we can say that expenses are regular expenditure of business which are finished after using like fuel, rent, salary etc. asset is long term value of something which are not finished after using the particular year as a computer, motorbike, closing stock etc. and depreciation is decrease value of an asset in a particular year which is noncash expenses. I hope that everybody gets cleared about it who want to know about this.

Thanks for Reading.