Operating Activities & Accumulated Depreciation
If you delve into a company’s operating activities, you can understand strategies, tactics and methodologies the business formulates to win the hearts and minds of customers, make money and elevate its commercial standing by the day. You also make sense of resources – such as fixed assets – that the organization uses to operate, as well as the depreciation it accumulates on these assets.
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Operating Activities
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The best way to learn more about an organization’s operating activities is to pore over its statement of cash flows, particularly the “cash flows from operating activities” section. Operating activities include selling merchandise, providing services or both, all of which contribute positively to an entity’s bottom line. This is what finance people often call the net result at the bottom of a statement of profit and loss, also known as an income statement or report on income. Operating activities that negatively affect company profitability essentially come from expenses, and they run the gamut from supplier remittances and employee compensation to money sent to business partners as diverse as insurers, contractors and maintenance machinists.
Accumulated Depreciation
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Depreciating an asset means divvying up its cost over several years, a time frame accountants call “useful life.” Only fixed assets – such as buildings, equipment and computer gear – are subject to depreciation because they generally lose value owing to obsolescence, degradation and passage of time. Accumulated depreciation is the aggregate depreciation amount a business has recorded on a tangible asset since it purchased the resource. Tangible asset is another name for a fixed asset, as are capital item, long-term asset and physical resource.
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Connection
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While accumulated depreciation is distinct from operating activities, both concepts make it into the day-to-day blueprint a business formulates to run efficient activities. Fixed assets play a central role in corporate activities, and it makes sense that top leadership heeds the obsolescence level of these resources to determine whether it’s tactically advantageous to replace assets, when to do it and how to spearhead the acquisition process without breaking the company’s bank.
Bookkeeping and Financial Reporting
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To depreciate a capital asset, a corporate bookkeeper debits the depreciation expense account and credits the accumulated depreciation account. Depreciation expense is integral to a statement of profit and loss. Accumulated depreciation is a contra-account that decreases the worth of the corresponding tangible resource on a statement of financial position, which is also known as a balance sheet or report on financial condition.
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