So, in this case as well, depreciation represents a real cost to the business. Depreciation allows $18,000 to be charged against income and increases our checking account, the same as in our first example. The difference is that we then pay interest and principal on the loan, which decreases our cash. But the principle is the same. Depreciation represents real cash.
The Lease We Can Do
Yeah, but what happens if we lease the equipment?
You certainly are full of questions today, aren’t you? When we lease equipment, we are, in fact, renting the equipment long term. That means the equipment does not go onto our balance sheet as an asset, and we do not recognize depreciation on it. Rather, we pay the leasing company a rental fee each month, which is deducted straight up from our income as equipment rental and depreciation just like rent.
Anyway, I trust that this explanation clears it up for everyone. Well, at least, maybe it helped a little.
Tom Crouser is chairman of CPrint International, teacher of business courses at CPrint University, and principal of Crouser & Associates, Inc., 235 Dutch Road, Charleston, WV 25302, (www.MyPRINTRresource.com/10004688), 304-965-7100. Contact him at 304-541-3714 or email@example.com. Connect on Facebook and LinkedIn and follow his tweets at www.twitter.com/tomcrouser.