How does depreciation expense affect cash flow?


Quick Answer

Depreciation is a non-cash expense, so it does not have a direct impact on cash flow, according to AccountingTools. However, when calculating cash flow, it is critical to take depreciation expense into consideration.

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Full Answer

Depreciation expense is the adjustment to the carrying value of a fixed asset, states Accounting Coach. When a person purchases fixed assets, the costs are capitalized and the expenses are incurred over a period of time. This expense is known as depreciation expense. Since actual cash is spent to acquire the initial asset, the subsequent depreciation expense is actually a noncash activity. Depreciation does, however, affect net income. Therefore when attempting to arrive at cash flow, a person should add depreciation expenses back to the net income balance, adds Boundless, an educational resource.

From a journal entry perspective, when depreciation expense is taken the depreciation expense account is debited and the accumulated depreciation account is credited, explains Accounting Coach. On the statement of cash flows, a specific line is dedicated to depreciation expense to avoid any confusion. This line can be found in the operating activities section of the cash flow statement. Similar to depreciation expense, depletion and amortization are additional expenses that do not impact cash flow.

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