On Depreciation Reserves & Non-GAAP Earnings
Capital Maintenance - Why is a Depreciation Expense Required? Economic calculation requires the entrepreneur to calculate his profits accurately so as to ensure he does not appropriate any amounts from earnings as dividends, in excess of the amount needed to maintain the income and scale of the enterprise. A key component in the profit & loss statement is the depreciation expense debited in respect of property, plant & equipment employed in production. This expense is not an actual cash outflow; rather it is an estimate of the reserves needed to finance future capital outlays. Maintenance of capital is one of the fundamental principles in many accounting standards frameworks. The sustenance of any enterprise relies on its capacity to produce earnings that are consistent (roughly) year-in and year-out. If the entrepreneur deceives himself and shows excess earnings, he might start drawing sums as dividends out of capital, and eventually putting his enterprise at danger. For when ...