How is Depreciation Shown on Financial and Tax Documents?

Depreciation on Financial and Tax Documents
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What is Depreciation?

Depreciation is a financial concept that affects both the financial statements and taxes for your business. But you won't ever see it on your bank reconciliation, in an invoice, or a bill from a creditor. 

Depreciation is a unique concept in business accounting in finances, because it doesn't have any actual meaning, but it is merely a way to account for changes in the value of an asset. It represents the decrease in the value of an asset over time, and depreciation is expressed in both the balance sheet and income statement of a business. Depreciation also affects your business taxes and is included on tax statements. 

How does depreciation work? Let's say you buy a business asset (like a new car), for $20,000. You've heard that the car depreciates as soon as it's driven off the lot. When you go to sell it a few years later, you find that you can only get $12,000 for it.  The $8,000 you lost is depreciation. It's an expense of doing business. 

By the way, depreciation has nothing to do with how you purchased the car. It's two separate transactions in your business financial statement. In this article, we're only going to look at the asset itself and the depreciation, and how they work for your business statements - your balance sheet and profit and loss statement - and for your business tax returns. 

Depreciation on Your Business Balance Sheet

The balance sheet of a business shows the value of the assets of the business against the value of the liabilities and owner's equity or retained earnings. Depreciation is included in the asset side of the balance sheet to show the decrease in value of capital assets at one point in time. It is expressed as "accumulated depreciation," or the total loss in value from the acquisition of the asset to the present time, leaving the book value as the remaining value of the asset. On the balance sheet, it looks like this:

  • Cost of assets
  • Less Accumulated Depreciation
  • Equals Book Value of Assets

Here is an example that could be found on a balance sheet, as of December 31, 2009:

  • Office Equipment $129,000
  • Less Accumulated Depreciation- Office Equipment $100,000
  • Book Value - Office Equipment $29,000

Showing depreciation in this way allows the reader to see the full value of the assets and the decrease in value, with the resulting book value.

Depreciation on the Income Statement (P&L Statement))

On the income statement, the amount of depreciation expensed or taken during time period in question is shown along with other expenses of the business. The expense for the time (usually a year) is added to previous depreciation expense to equal accumulated depreciation.

Using the example above, the depreciation expense for 2010 on Office Equipment might be $12,000, which would show as an expense on the Income Statement. Thus, at the end of 2010, Office Equipment might look like this on the Balance Sheet:

  • Office Equipment $129,000
  • Less Accumulated Depreciation- Office Equipment $112,000
  • Book Value - Office Equipment $17,000

Depreciation in Your Business Tax Documents

Depreciation for the tax year, for all depreciated assets, is included on your business tax return as a business expense. Each type of business tax form has an expense line for depreciation: 

  • On Schedule C for sole proprietors and single-member LLC's - line 13
  • On Form 1065 for partnerships and multiple-member LLC's - line 16a
  • On Form 1120 for corporations - line 20
  • On Form 1120-s for S corporations - line 14. 

In some circumstances, you will also have to complete an extra form, IRS Form 4562 - Depreciation and Amortization to verify the total depreciation expense shown on your business tax return. This tax form totals all depreciated assets. It is a complex form and requires a tax professional to complete.