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HM Accountax Ltd
HM Accountax Ltd, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 134
Experience:  I am an accountancy professional with more than10 years hand on experience in audit, accountancy and tax affairs.
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I have seen some companies P&L account and they offset their

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I have seen some companies P&L account and they offset their profit with depreciation expense. Why depreciation expense is used to offset net income. I know it is added back for tax adjustments as it is not tax-deductible but why put it in first place because initially the asset may have been claimed under capital allowance so no/little tax had been paid on it. We can just have a separate accumulated depreciation account to estimate the current value of the asset but what does this have to do with the profit?

Hi,

I am an advisor at Just Answer and I am pleased to help you.

Depreciation is an accounting adjustment prescribed by accounting standards to spread the cost of the asset over its useful life.

Accounting depreciation and tax depreciation (capital allowances) are two different things.

Accounting principles suggest that we need to do the accounting depreciation but HMRC disallows it and have their own way of calculating the tax depreciation.

To keep both happy, we do accounting depreciation and tax depreciation in the accounts.

With regards ***** ***** question " We can just have a separate accumulated depreciation account to estimate the current value of the asset but what does this have to do with the profit?" we do double entry accounting, if we create one side in accumulated depreciation, where will the balance go?

I hope this answers your question.

Regards

HM Accountax

Customer: replied 2 days ago.
Well ok I get the point now thanks. But would you agree that it does not make a difference to net income but it has to be done in double entry accounting (Debit to depreciation expense and credit the contra asset account 'accumulated depreciation ') to balance it?

it doesn't make and difference but it makes accounting principles happy.

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