Building Your Business Business Taxes How is Depreciation Shown on Accounting and Tax Documents? Depreciation in Your Business Accounting and Tax Reports By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on January 27, 2021 Share Tweet Pin Email In This Article View All In This Article Why Depreciation is Important How Depreciation Works Depreciation on a Balance Sheet Depreciation on a P&L Statement Depreciation in Business Tax Forms Depreciation on Financial and Tax Documents. Photo: PhotoAlto/Odilon Dimier/Getty Images Depreciation is a financial concept that affects both your business accounting financial statements and taxes for your business. But you won't ever see it on your bank reconciliation, in an invoice, or a bill from a creditor. Why Depreciation is Essential in Accounting Depreciation is a way to account for changes in the value of an asset. (An asset is something that has continuing value, like a computer, a car, or a piece of machinery.) It represents the decrease in the value of an asset over time. It's expressed in both the balance sheet and income statement of a business. Depreciation also affects your business taxes and is included on tax statements. Depreciation is necessary because if you didn't have it, you would not correctly show the expense of owning an asset. Here's the issue: If you buy the services of a CPA to do your business tax return, you deduct the expense in the year you buy it. But you also use the expense in that year. If you buy a car for business use, you use it over several years, so the expense should be spread out over the years you use it. Note Depreciation is called a "non-cash" expense. You can deduct depreciation expenses on your business tax form, but you don't have to take money out of your business checking account to do that. How Depreciation Works Let's say you buy a business asset (like a car for business use), for $20,000. You've heard that the car depreciates as soon as it's driven off the lot; this is how it works. When you sell it a few years later, you find that you can only get $12,000 for it. The $8,000 you lost is depreciation. It's an expense of doing business. Note Depreciation has nothing to do with how you purchased the car. The purchase of the car and the depreciation on it are two separate transactions in your business accounting system. In this article, we're only going to look at the asset itself and the depreciation, and how they work for your business accounting statements - your balance sheet and profit and loss statement - and for your business tax returns. Depreciation on Your Balance Sheet The balance sheet of a business shows the value of the assets of the business against the value of the liabilities and owner's equity or retained earnings. Depreciation is included in the asset side of the balance sheet to show the decrease in value of capital assets at one point in time. It is expressed as "accumulated depreciation," or the total loss in value from the acquisition of the asset to the present time, leaving the book value as the remaining value of the asset. On the balance sheet, it looks like this: Cost of assetsLess Accumulated DepreciationEquals Book Value of Assets Here is an example that could be found on a balance sheet, as of December 31, 2020: Office Equipment $129,000Less Accumulated Depreciation- Office Equipment $100,000Book Value - Office Equipment $29,000 Showing depreciation in this way allows the reader to see the full value of the assets and the decrease in value, with the resulting book value. Depreciation on the Income Statement (P&L Statement) On the income statement, the amount of depreciation expensed or taken during the time period in question is shown along with other expenses of the business. The expense for the time (usually a year) is added to the previous depreciation expense to equal accumulated depreciation. Using the example above, the depreciation expense for 2020 on Office Equipment might be $12,000, which would show as an expense on the Income Statement. Thus, at the end of 2020, Office Equipment might look like this on the Balance Sheet: Office Equipment $129,000Less Accumulated Depreciation- Office Equipment $112,000Book Value - Office Equipment $17,000 Depreciation in Your Business Tax Documents Depreciation for the tax year, for all depreciated assets, is included on your business tax return as a business expense. Each type of business tax form has an expense line for depreciation. In some circumstances, you will also have to complete an extra form, IRS Form 4562 - Depreciation and Amortization to verify the total depreciation expense shown on your business tax return. This tax form totals all depreciated assets. It is a complex form and requires a tax professional to complete. Note IRS Publication 946 has detailed information about how to depreciate property. If you have business assets that you think can be depreciated, check with your tax professional about the process to report depreciation on your business tax return. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Topic No. 704 Depreciation." Accessed Jan.13, 2021. Simple-Accounting. "Depreciation Definition." Accessed Jan. 13, 2021.