How to Work Out Depreciation
If you manage an accountancy practice, you know what depreciation means—it happens when a business asset loses its value over time. For instance, it's when a car gradually depreciates from its original purchase cost as it moves through its productive life.
Depreciation is an accounting method that represents how much you used an asset's value. Every company must account for it as it significantly affects its profits. Now the question that companies seek is how to work out depreciation.
Keep reading to learn more about what can depreciate for most businesses and the techniques to measure depreciation.
Depreciation in Business: An Overview
You might wonder what depreciates in businesses, especially since these expenses are tax-deductible. However, note that not all tax deductibles are depreciable.
Generally, you can depreciate most types of tangible property, like buildings, machinery and furniture, vehicles, and so on. The intangible properties, like copyrights, patents, and computer software, are also depreciable. However, when it comes to most businesses, you can only depreciate fixed assets.
Understanding Fixed Assets
It is crucial to understand a fixed asset to help a business generate income over more than a year. Typically, this includes things like computers, machinery, buildings, vehicles, and office furniture. Some leased items can be depreciable, too, as fixed assets don't necessarily have to be owned by a business.
Intangible assets such as copyrights and patents are also depreciable. However, assets that don't lose value, like land or stock, can never be depreciable.
Techniques in Calculating Depreciation
There are several means of calculating depreciation, where some are complicated that require small businesses to enlist accountancy services to guide you. Here are three of the most common techniques to help you.
1. Diminishing Value Depreciation
In the technique where you diminish value depreciation, you must remember that an asset loses its value at a higher percentage in the first few years. Eventually, as time goes on, the rate of depreciation slows down.
2. Straight Line Depreciation
For the straight-line depreciation method, the asset depreciates the same amount annually until it reaches a zero value. To help you visualize, an investment expected to last five years would depreciate by one-fifth of its yearly ticket price.
3. Units of Production Depreciation
You can measure some assets' lifespan by their work rather than by the time they serve. For instance, a food processor can process a specific measurement of food, or a truck might travel a particular number of miles. Instead of depreciating these assets based on their age, do so based on the usage.
Depreciation might seem daunting initially but worry not as it will help you lower your tax bills and aid you in understanding your costs better. After all, it is very important to understand your business costs, your taxes, and everything about your finances.
If you need help with depreciating your fixed assets, you can always count on us at 1 to 1 Accountants. We can connect you to one of our experts so you can have an accountant for your small business that will help manage your financial concerns. Contact us today to learn more.