Question

Depreciation on plant and machinery is

• A. Source of fund
• B. Application of fund
• C. No flow of fund
• D. None of these

Hint:

Depreciation is a non-cash expense — it affects profit but not the flow of funds in or out of the business.

Answer 1

The Correct Option is C

Step 1: Understanding depreciation.
Depreciation is the reduction in the value of an asset over time due to wear and tear, usage, or obsolescence.
It is a non-cash expense recorded in the books to allocate the cost of an asset over its useful life.
Step 2: Accounting treatment.
In accounting, depreciation is charged annually to reflect the decline in value of fixed assets like machinery, equipment, or vehicles.
Although it reduces profits, no actual cash outflow occurs at the time of recording depreciation.
Step 3: Why it is 'No flow of fund'.
Since depreciation does not involve any cash transaction, it is neither a source nor an application of funds.
It simply adjusts the book value of assets and reduces taxable income without affecting the actual cash position of the business.
Step 4: Example.
If a company buys a machine worth ₹1,00,000 and charges ₹10,000 as depreciation annually, this ₹10,000 reduces profit but does not involve any cash flow.
Therefore, it is a non-fund or non-cash item.
Step 5: Analysis of options.
- (1) Source of fund: Incorrect — no cash inflow occurs.
- (2) Application of fund: Incorrect — no cash outflow occurs.
- (3) No flow of fund: Correct — depreciation only affects accounting records, not cash flow.
- (4) None of these: Incorrect.
Step 6: Conclusion.
Hence, depreciation on plant and machinery is classified as No flow of fund.