Net income includes depreciation as an expense.
Gross profit is derived by subtracting the cost of goods sold from net sales. Net income is derived by subtracting operational costs, depreciation, amortization, interest and tax expenses from gross profits. Since depreciation is a rather prominent expense, net income does indeed include it.
Depreciation
Depreciation is the routine 'wear and tear' that machines, equipment and other long-term assets with material existence undergo in the course of business operations. It is a catch-all term for the aging of the assets, minor damage too insignificant to impair their use and operation, and other items that decrease their resell value. Depreciation is counted as an independent expense rather than shunted to repair and replacement costs because accountants want to create more accurate depictions of a business's financial circumstances by matching costs to the revenues that they were incurred in the production thereof.
Depreciation in Accounting
Depreciation is an expense that is charged once each accounting period and has its value added to long-term liabilities called counter-assets. Counter-assets are, as their name suggests, accounting items intended to match and contrast their counterparts. Once the time comes to dispose of a depreciated asset and its value is written off, so too is its counter-asset in order to reflect the truth that the 'wear and tear' was an ongoing and gradual process, rather than a one-time break. Since depreciation can be quite significant depending on how much a business owns in material assets, it is important to the calculation of profit and thus taxation.
Depreciation Methods
The amount of depreciation charged in each accounting period is dependent on the depreciation method used on the base asset. Regulations and recommendations exist on which method can be applied to which classes of assets, and the interpretation of a business's accounting statements can differ wildly, depending on how the business has chosen to comply with these rules. Some of the most popular depreciation methods include straight-line, where the same amount of depreciation is charged in each accounting period, and declining balance, where a percentage of the asset's remaining value is charged in each accounting period.
Depreciation in Tax Accounting
Most taxation agencies regulate the methods that a business can use to depreciate its assets and manipulate its income. Such regulations can include the depreciation rates applicable to classes of assets and also depreciation methods. In the United States, the IRS mandates the use of what is called the Modified Accelerated Cost Recovery System, where each asset has its own depreciation method based on the class to which it is allocated.
