Definition of New Machine’s Effect on Profit
The purchase of a new machine that will be used in a business will affect the profit and loss statement (income statement) when the machine is placed into service and the depreciation expense begins. This expense will reduce the company’s profits (net income, earnings). There may also be some additional revenues and costs, and perhaps cost savings, that will also affect the profits reported on the income statement.
Since depreciation spreads the machine’s cost to depreciation expense over the life of the machine, the impact on the company’s profit may be relatively small in the first accounting year compared to the cost of the machine.
Example of New Machine’s Effect on Profit
Assume that a company’s accounting year ends on December 31 of each year. On July 1, the company purchases a new machine for $300,000 that is expected to have no salvage value at the end of its 10-year useful life. If the company uses the straight-line method of depreciation, the depreciation expense in the first accounting year will be $15,000 ($300,000/10 years = $30,000 per year X 1/2 year). For the next nine accounting years the depreciation expense will be $30,000 and then $15,000 in the final accounting year.
If the machine is used by a manufacturer, the depreciation, electricity, and maintenance of the machine will be part of manufacturing overhead. This overhead is assigned to (and will cling to) the products manufactured. If the products are in inventory, their cost (including some of the machine’s depreciation) will be part of the inventory. When the products are sold, the overhead costs (including some of the machine’s depreciation) will be part of the cost of goods sold shown on the income statement.
