How does depreciation's effect on BS balance?

I understand that depreciation decreases PP&E on the asset side and retained earnings on the liabilities side. However, I don't understand how these deductions balance? I thought that depreciation applies a tax shield to net income, so NI does not actually decrease by exactly the depreciation expense.

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Comments (2)

Jul 30, 2017

You are forgetting the cash component. $10 depreciation expense will reduce net income by $6 (assuming a 40% tax rate)

So on the balance sheet

Cash +4
PP&E -10

Retained earnings -6

    • 1
Jul 30, 2017

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