In a cash flow budget, should depreciation allowances be accounted for?

In a cash flow budget, including depreciation allowances is important because it provides a more accurate representation of the expenses associated with using fixed assets over time. Depreciation is a non-cash expense that reflects the reduction in value of an asset as it is used, and recognizing it in the budget helps stakeholders understand the costs associated with asset wear and tear. Although it doesn't directly affect cash flow since no cash is leaving the business as a result, it does impact profit and tax calculations.

By including depreciation, management can have a better understanding of the long-term financial impacts of their capital investments and make more informed operational and financial decisions. It allows for better forecasting of cash needs for replacements or maintenance of assets.

This approach aligns with generally accepted accounting principles, which advocate for the accurate representation of expenses to ensure financial statements reflect the economic reality of the organization’s operations. Thus, accounting for depreciation allowances enhances the clarity and utility of a cash flow budget.