I'm reading a guide and studying interview questions. One is this:
What is the link between the balance sheet and income statement? ---The main link between the two is profits from the IS are added to the BS as retained earnings. (I understand this) ---Next, the interest expense on the IS is charged on the debt that is recorded on the BS. (I understand this) ---D&A is a capitalized expense from the IS that will reduce the PP&E on the asset side of the BS. (Doesn't make sense to me)
Can anyone explain that last point?
Thanks so much.
Depreciation and Amortization is a non-cash expense that reduces the amount of PP&E on the balance sheet. What exactly don't you understand so I can better explain
Thanks for your offer. I don't understand why Depreciation and Amortization reduces the amount of PP&E on the balance sheet. How/why are those two related?
PP&E on the BS is the Net value of the company's PP&E. So its the value of the PP&E the company owns including new PP&E acquired MINUS the Depreciation of the existing PP&E
Thanks very much. SB'd.
Property Plant and Equipment has a deprciable life for accounting purposes. You don’t expense say a piece of machinery you purchase, but instead capitalize it because you need to recognize it over the time it generates revenue. If you believe that over 15 years that machinery you purchase will be able to generate revenue then you expense it over that same period. Matching principle. However, depreciation is a non cash expense, as is amortization thus only decreasing your net income and not actual cash position. You add it back in the cash flow. Your accumulated depreciation is the year over year total of depreciation expense to get the carrying value of the PPE on your balance sheet. Hope that makes sense..
^ This is a good explanation.
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