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Spending on day-to-day expenses is termed revenue expenditure. This shows up in the income statement and affects profits. Spending on future investment is terme

Spending on day-to-day expenses is termed revenue expenditure. This shows up in the income statement and affects profits. Spending on future investment is termed capital expenditure. This is not shown on the income statement and does not affect profits. (It's on the balance sheet instead) Eg. Buying a new warehouse does not decrease profits (but it will of course affect your cash). Blue-sky R&D is also recorded as an asset (and depreciated as normal). At least, that's what I was taught as a trainee accountant. Though I've learnt in practice that things are reclassified for tax purposes. Lower profits mean lower tax after all.

gujk 15y ago
But depreciation is an expense, yes? So Amazon gets to average their investments for a 7-year rolling window or whatever, not postpone them indefinitely. Unless there is a way to claim that the software/IP has some resale value remotely approaching its cost to build?
- polymatter 15y ago
  true, depreciation is an expense but one that accountants can fiddle with. I am only a trainee accountant and UK accounts are different from US accounts in ways I am not familiar, so don't take this as legal advice or anything. For start though, the deprecation policy itself can be changed. So as long as there is a note in the accounts giving some justification, I can say "I am not depreciating these assets". This is a crude way to manipulate depreciation and generally any competent auditor would flag it. Buying a new warehouse for example you generally wouldn't depreciate at all (usually holding it at cost and revaluing it every so often). So apportion all costs relating to buying the warehouse (including cost of machinery in the warehouse, connecting it to your IT network, legal and admin work) as a one line item Fixed Asset: Warehouse, and you just avoided all depreciation. (It will still be shown on the accounts, but doesn't touch the income statement.) Or you can decide to put it as a 5-year rolling investment as you put it and you're charging 20% depreciation. Or you can decide that this investment is not a one-off thing and is part of the core business (perhaps you're buying warehouses all the time). So then you can charge the whole lost as an expense. I suppose my point (back to the topic) is that Amazon's profits have gone down largely because of how Amazon's accountants have decided the best way of presenting their investment costs in their accounts. It makes sense to reduce book profits as that reduces your taxes. (Generally true, though I know in UK corporation tax calculations we don't take into account depreciation for the very reason that its manipulatable). A profit dive is especially fine if you have continued impressive revenue growth to point to and can claim that these investments are clearly worth it. Nobody is going to claim that Amazon is in serious trouble.

gujk 15y ago

But depreciation is an expense, yes? So Amazon gets to average their investments for a 7-year rolling window or whatever, not postpone them indefinitely. Unless there is a way to claim that the software/IP has some resale value remotely approaching its cost to build?

polymatter 15y ago
true, depreciation is an expense but one that accountants can fiddle with. I am only a trainee accountant and UK accounts are different from US accounts in ways I am not familiar, so don't take this as legal advice or anything. For start though, the deprecation policy itself can be changed. So as long as there is a note in the accounts giving some justification, I can say "I am not depreciating these assets". This is a crude way to manipulate depreciation and generally any competent auditor would flag it. Buying a new warehouse for example you generally wouldn't depreciate at all (usually holding it at cost and revaluing it every so often). So apportion all costs relating to buying the warehouse (including cost of machinery in the warehouse, connecting it to your IT network, legal and admin work) as a one line item Fixed Asset: Warehouse, and you just avoided all depreciation. (It will still be shown on the accounts, but doesn't touch the income statement.) Or you can decide to put it as a 5-year rolling investment as you put it and you're charging 20% depreciation. Or you can decide that this investment is not a one-off thing and is part of the core business (perhaps you're buying warehouses all the time). So then you can charge the whole lost as an expense. I suppose my point (back to the topic) is that Amazon's profits have gone down largely because of how Amazon's accountants have decided the best way of presenting their investment costs in their accounts. It makes sense to reduce book profits as that reduces your taxes. (Generally true, though I know in UK corporation tax calculations we don't take into account depreciation for the very reason that its manipulatable). A profit dive is especially fine if you have continued impressive revenue growth to point to and can claim that these investments are clearly worth it. Nobody is going to claim that Amazon is in serious trouble.