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Can depreciation be considered as a source of internal fin.?

Shruti (stu) (77 Points)

28 December 2011

Can depreciation be considered as a source of internal finance..?

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10 Replies

Yogesh Bhandari (CA FINAL Student) (429 Points)
Replied 28 December 2011

I am not getting you clearly,, how could be depreciation considered as internal finance as it is the non-cash item.

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(Guest)

Reserves can be used for internal source of finance....

B.Vithal (Audit assistant) (30 Points)
Replied 29 December 2011

Dear Shruti,

Depreciation can be considered as source of internal finance. In one way as no cash is paid against this head of expense,internally finance is generated to the extent the amount stands to the debit of this account. The other way round when it is added back to profits of the firm to arrive at the earnings of the firm it definitely adds to the earnings and increases the earnings of the firm.Hence, it can be considered as internal source of very short term finance.

Regards and warm wishes for the new year-2012.

Vithal.

Narendra kumar (CFO) (38 Points)
Replied 29 December 2011

The depreciation is for utility and diminishing the value of FA. As well known and considered as non cash item according to AS/ IFRS.

The question which I see is tremendous and rocking. Depreciation is not a cause and for effect in financing only a small point of cash flow measurement. “ Financing in project / Business for any terms being prohibited the effect of non – free reserves “ by all financial institution acrossThe world”

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 29 December 2011

a debatable issues...........................but i say yes it is a source of internal finance

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Yogesh Bhandari (CA FINAL Student) (429 Points)
Replied 30 December 2011

Depreciation is the amount write off in respect of fixed assets which purchased through cash/finance.
In A/cs it shown in P & L and for understanding it can be considered a recovery of Fixed assets amount in terms of earning propotionate to expenses.

We all know, retained earnings/reserves considered as internal finance resources which ascertained after deducting Tax and Depreciation...

depreciation is proportionate recovery of initial outflow for purchase of fixed assets and an amount of earning over it can be considered as internal finance.

(Guest)

Originally posted by : Yogesh Bhandari
	Depreciation is the amount write off in respect of fixed assets which purchased through cash/finance. In A/cs it shown in P & L and for understanding it can be considered a recovery of Fixed assets amount in terms of earning propotionate to expenses. We all know, retained earnings/reserves considered as internal finance resources which ascertained after deducting Tax and Depreciation... depreciation is proportionate recovery of initial outflow for purchase of fixed assets and an amount of earning over it can be considered as internal finance.

Fully concur with this reply

Rajesh (student) (167 Points)
Replied 30 December 2011

There are several sources of internal finance. One is depreciation, a tactic that increasescash flow by allowing companies to write down the value of assets over time. Depreciationcan be a very powerful accounting tool when it is applied correctly. As assets are depreciated, tax liability decreases, allowing the money to keep funds that it otherwise would have needed to use to pay taxes. This frees up capital for investments and other endeavors.

Kolluru Krishna Murty (Partner) (315 Points)
Replied 04 January 2012

There is no doubt it is an internal resource for all purposes.

kkm

Pooja Parmar (CS Finals) (21 Points)
Replied 27 March 2015

Depreciation is a source of internal finance though its non cash item in books but its a recognising of the value of asset which will reduce each year and attempting to identify amount of cash to set aside when the asset is no longer in use to us... Its also being considered as an expense to reduce our taxable income....

Whatever may be the outcome of such controversy, the fact remains that the depreciation is a sum that is set apart out of profits and retained within the business and finance the capital needs in the normal business routine, and as such depreciation in true academic sense be deemed as a source of internal finance.