Depreciation query

[MisterMusty]

I'm trying to plan a cafe/bakery business and an struggling to get my head round depreciation accounting. I get that it is covering the amount my equipment depreciates in value over time. So if I paid £2,000 for a fridge and will get £50 for it in 5 years time it costs me £390 per year. That's clear.

What I don't get is A) why does it appear on my P&L? I can understand it appearing on the balance sheet as it's an asset that's losing value, but it seems to be the only cost on the P&L that I don't have to physically pay out. The only 'conceptual' cost on there.

and B) what does it and doesn't it apply to? So is it just on big items like hob ranges and fridges or does it also include tables and coffee machines and uniforms etc?

Any help much appreciated folks.

 

[Scalloway]

VAT does appear in your balance sheet. The cumulative value is deducted from the cost of the asset.

It applies to any asset that is capitalised, ie not fully written of in the P & L in the year it is bought.

 

[Anna Chandley]

The depreciation each year will show as a P&L expense and the net book value of the asset on the balance sheet will reduce each year by the depreciation charged in the year. When you come to calculate your taxable profit you will addback the depreciation charged in the year to your profit and deduct capital allowances on the assets. Depreciation is purely an accounting concept.

The cost of equipment should be shown as an asset if it has a useful life of more than 1 year otherwise it should be shown as an expense in the P&L. Most businesses choose to not capitalise assets under a particular amount eg anything costing less than £500 is taken to the P&L as an expense.