Question

Are the contra accounts known as depreciation or amortization a consideration for cash flow in any way?

Answer 1

A contra account is an account that help in the recording of original amount and reduction in that asset class, so that the net amount will be reported. Depreciation or Amortization comes under the contra account as depreciation are shown in the Balance Sheet below the asset. Depreciation amount will appear on the income statement as depreciation expense. Depreciation or Amortization are considered for cash flow as depreciation appears on the cash flow statement in the operating activities as a addback. It means adding back the depreciation in cash flow statement will increase the cash with that amount since cash is not spend on that expense.

For example, The purchased machinery of amount $40,000 with the recorded depreciation of $5000 will appear in the balance sheet as Machinery $40,000 less Depreciation $5000, for a net asset value of $35,000. The amount of depreciation will appear in the income statement as a depreciation expense of $5,000. On the cash flow statement, we will add back the depreciation amount of $5,000 which we increase the cash with $5,000 in operating activities.

Thus, depreciation affects the cash flow of the company.