Is Depreciation an Operating Expense

Sir, please clear my confusion about DEPRECIATION....

Is depreciation an operating expenses? If yes then how and if no then why we assume depreciation as operating expenses while calculating operating ratio.

Sir please clear my confusion ....]

THANKS

Ritesh Garg from India

Dear Ritesh Garg! Before to know the answer of this question, you should know the proper meaning of operating expenses. Operating expenses are those expenses which are necessary for operation of business. For example, we have retail business. For buying the goods on wholesale, we have to pay the travel cost. We have to pay electricity bill. We have to pay property tax. If we are doing small advertising, we have to pay for this. Like this, there are lots of expenses which we have to pay if we have to operate our retail business.

Now, we have to decide whether depreciation is our operating expense or not. Depreciation is the decrease in the value of any fixed asset. If we use these assets for the operation of business, value of fixed asset will decrease. The measurement of this decrease is depreciation. So, depreciation is our operating expenses because it is totally association for operation of business. We normally say, by using in the business our building depreciates 10%, furniture 15% and vehicle 20%. Income tax law also accepted it as operating expense but its rates are different for measuring annual depreciation. If we have to take the depreciation deduction, we have to deduct it from our total incomes as per the rates of law.

Some person may argue that we do not pay this expense. We can explain them that we have already bought the fixed asset which is our capital expenditure not operating expenditure and which we have bought by paying money. But when we will use it, it will convert into operating expenses. All the Fixed assets's value (except land) will decrease when we will use them for operation of business.