Whom we do pay depreciation to?

[Continental Sky]

OK, if you search the forum for "depreciation", there are dozens of topics on that issue; so I was reluctant to open it again, but there is one thing that bothers me - why is depreciation shown in my Income Statement?

I'm not from a financial branch at all, but to my understanding, depreciation is not an expense.

Let me put it this way: for each item in Income Statement report, there is a beneficiary of money in question:

Staff salaries, obviously paid to staff.
Staff training, paid to guy who runs a training center or whatever.
Fuel, fuel contract and hedge fees, paid to fuel supplier.
Aircraft maintenance, paid to contractor and spare parts supplier.
Aircraft leases, paid to lessors.

etc., etc., each item is logical, there is someone on the other side who takes money for services or materials they provide.

Then comes depreciation. Who do I pay it to? That's what bothers me, who gets those money? Are there small green gremlins inside the aircraft, who eat engines and seats, thus making them inoperable after a quarter of century or so, and they get paid for that job? 

Once I exchange my hard earned virtual cash for a new bird, I should not pay anything to anyone just for owning it! It looks like depreciation cost is on par with leasing cost, it makes no sense - I purchased a machine, and I pay almost the same fee as if I leased it. It makes no sense. Depreciation should be of course displayed in Balance Sheet, as aircraft value of course decreases over time, but it should not be treated as expense.

In the search, there is this topic: https://www.airwaysim.com/forum/index.php/topic,51385.msg292032.html#msg292032 It's pretty short and no replies at all, but it looks like it expresses my concern as well - depreciation should not be included in income statement. Or am I wrong?

[SP7]

You don't pay anyone. It's on your financial statement as a write off against taxes. In your cash flow statement you can see that there's a positive cash flow for deprecation offsetting the negative operating expense.


So don't worry, that money doesn't go anywhere. You can technically have negative profits but positive cash flow through depreciation.

[AngryOpossum]

SP7 is correct. If you look on your cash flow statement, there is a line for "Adjustments of items where a payment is not included", and depreciation is included there. There's no payment to anyone, but there is still a decrease in the value of your assets (and therefore your company).

Just like if you own a car and hold on to it for 10 years, it's worth less than it was 10 years ago, even though no cash came out of your pocket.

[swiftus27]

Depreciation is a non cash expense.   It is the delta in value of an asset over a period of time.   The term "basis" is the current depreciated value.  Sell below your basis and you have a loss on sale.  Sell above and gain on sale.   

There is a term called EBITDA.  It stands for Earnings before Interest, Depreciation and Amortization.   It is essentially a business' true net cash flow from operations.   Many businesses can rapidly depreciate an asset.  For instance, there is a Section 179 Depreciation law in the USA.  You can write down a purchased asset to $0 immediately.  This will drastically lower your net income and thus your taxable income.    If you sell that asset any income you receive would be subject to capital gains tax.    This is done to help bolster an economy by incentivizing capital investment.   

[Pup]

I wanted to sound like a smart accountant and chime in here, but the responses above have pretty much nailed it.

Whoever sold you the bird twenty years ago was the beneficiary if you want to keep it simple

[schro]

I'll make it a bit more simple -

When you buy an asset (plane), it's an asset for asset transaction - you trade cash for plane of same value. That asset is now on your books, but it does not live forever - it has an estimated useful life, to which you depreciate it to match the overall "cost" of buying the plane across its useful life. The amount that's depreciated is figured as follows: cost to purchase asset minus scrap value at end of life divided by periods til end of life (i.e. weeks/months/years whatever the measure is).

In AWS, the "useful life" of a plane is 25 years, so very simplistically*, a 35m plane with a 10m scrap value will be expensed at the rate of 1m/year. It is a non-cash expense because you've already bought the plane, you're just representing your usage of it in your income statement. At the end of the 25 years, that 35m asset will have been reduced to a 10m asset on your books.

*Note that major improvements and refurbishments, such as D checks get added into the asset value and depreciated as opposed to being immediately expensed.