Accounting has several purposes in business, one of which is to measure and control the cash resources from operations. Accounting also provides procedures for other financial-related items, such as asset purchases and depreciation.
Depreciation is a monthly expense allowed by accounting standards to reduce the value of a company’s assets. This figure is a non-cash expense, meaning the company is not actually spending cash. Therefore, depreciation does not fit into the cash budget, which tracks all real cash inflows and outflows.
The cash budget helps companies estimate, plan and control the necessary expenditures needed to run an organization. This budget typically includes information from all departments. Each department will have specific restraints for spending to ensure more cash comes in than goes out.
Companies using a cash flow statement will find that they must add back depreciation when figuring cash flows for an accounting period. This follows the principle of not allowing non-cash expenses to create a distorted view of all cash collected by the business.
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