Depreciation is the loss of value in an asset over time. For example, when a business (Also see Business Valuation Techniques for Accountants) buys a car or a machine, it slowly loses value each year. This is because of usage, wear and tear, or becoming outdated. Depreciation is important because it helps businesses show the true value of their assets. If you want help understanding depreciation better, you can contact an accounting firm in Kota Kinabalu for support. 

Depreciation affects the income statement. It is recorded as an expense every year. This means that it reduces the total profit a company shows. Even though no money is spent when recording depreciation, it still lowers the profit. This helps businesses (Also see Accounting for Small Business Entities) show a more accurate picture of their yearly income. 

Depreciation also affects the balance sheet. On the balance sheet, the value of assets is shown. When depreciation is recorded, the value of the asset goes down. This means the company shows fewer total assets over time. It helps to avoid showing too high a value for old items. 

The cash flow statement is another report that depreciation affects. Even though depreciation is not an actual cash payment, it is added back when calculating cash flow (Also see Understanding the Statement of Cash Flows) . This helps investors and managers understand how much real money is available to use. 

In conclusion, depreciation is a key part of accounting (Also see Bookkeeping and Accounting System Weakness). It helps show a true and fair view of a company’s finances. Understanding how it works is important for business owners. With the help of an accountant, managing depreciation becomes much easier.