What is the effect of depreciation on profit or loss?

What is the effect of depreciation on profit or loss?

• A. Depreciation increases profit
• B. Depreciation reduces profit
• C. Depreciation has no effect on profit
• D. Depreciation increases cash

Answer: (B)

Depreciation is an accounting expense charged against profit to allocate the cost of a fixed asset over its useful life. Because it is an expense, it reduces the profit shown on the income statement for the period. It does not involve a cash outflow in the period it’s recognised (the cash was spent when the asset was purchased), so it doesn’t directly decrease cash in that period. In practice, depreciation can affect cash flow indirectly through tax relief, but the direct effect on profit or loss is a reduction in reported profit.

Depreciation is an accounting expense charged against profit to allocate the cost of a fixed asset over its useful life. Because it is an expense, it reduces the profit shown on the income statement for the period. It does not involve a cash outflow in the period it’s recognised (the cash was spent when the asset was purchased), so it doesn’t directly decrease cash in that period. In practice, depreciation can affect cash flow indirectly through tax relief, but the direct effect on profit or loss is a reduction in reported profit.