UNDERSTANDING ASSET DEPRECIATION
It’s no secret that your assets will lose value over time, and if you’re not properly tracking the depreciation of said assets, chances are you’ll end up over paying on your taxes each year.
To ensure this doesn’t happen, we have created a guide to help you understand everything you need to know about depreciation.
WHAT IS ASSET DEPRECIATION?
Asset depreciation is used for tax-write off. More specifically, it is used to help businesses pay for fixed assets over time. It can be used in both taxes and accounting and can be applied to a variety of asset costs such as:
- Buildings
- Vehicles
- Equipment
- Furniture
- Machines
- Software
While the process of asset depreciation does not create a source of revenue, it does allow companies to see the value of an asset over time. This information can then be used to report actual asset expenses in contrast to just the cost of the initial asset purchase.
IMPORTANT DEPRECIATION CALCULATION FACTORS
When calculating depreciation, it is important to consider the following three factors:
USEFUL LIFE
This factor is used to calculate the amount of time a company expects a specific asset to be productive. It is during this time period that depreciation of an asset should be calculated.
SALVAGE VALUE
The salvage value is known as the reduced amount an asset can be sold for once a company no longer wants/needs said asset. Depreciation can be calculated by subtracting the salvage value from the asset cost.
DEPRECIATION METHOD
There are two main methods that can be used for calculating depreciation.
- Straight Line Method: is calculated by taking the overall deprecation of an asset and dividing it evenly over the useful life. This method makes for easy calculation.
- Accelerated Method: creates more depreciation early on in the life of a fixed asset and helps defer a portion of income tax.
BENEFITS OF DEPRECIATION
While these processes seem complicated, they are extremely beneficial. Depreciation can lead to major tax savings, which can also help to allocate funds to future asset acquirement. Other benefits that can be reaped from depreciation include:
- Depreciation helps companies accurately state incurred expense from asset use and compare that expense to the asset revenue.
- Depreciation also helps companies report the correct net book value of a given asset.
- Depreciation allows for businesses to recover the original cost of an asset.
- Certain tax rules make depreciation tax deductible; therefore, a greater depreciation expense helps to lower taxable income and increase tax savings.