How does the purchase of a new machine affect the profit and loss statement?

The purchase of a new machine that will be used in a business will affect the profit and loss statement, or income statement, when the machine is placed into service. At that point, depreciation expense will begin and there will likely be other expenses such as wages, maintenance, electricity, and so on.

Since the income statement reports only the expenses that match the revenues during the accounting period, the depreciation expense might be very small in the first accounting period compared to the amount spent for the machine. For example, if the machine is purchased half way into the accounting year and its cost was $300,000, the depreciation for that first accounting period might be only $15,000—assuming it has a 10 year life and no salvage value. In the next accounting period the depreciation expense will be $30,000 under the straight-line method.

If the machine is used by a manufacturer, the depreciation, electricity, and maintenance of the machine will be recorded as manufacturing overhead. This overhead is then assigned to the products and will be held in inventory until the goods are sold. When the products are sold, these overhead costs will be reported on the income statement as part of the cost of goods sold.

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