It is crucial to analyze how your organization utilizes depreciation. It can be regarded as an important part of the expenses on a company's income statement.
The main objective is to maintain accurate bookkeeping records & saving expenses. However, calculating depreciation can be a hectic task.
Therefore, depreciation tracking is very important for asset management and calculating the exact value of each asset.
While there are government rules & regulations for depreciation. There is still a lot of space for accountants & executives to settle on innovative accounting resolution. It pays to look at depreciation very closely. Organizations endeavor to work hard & ensure their fundamentals look great to investors, financial experts and analysts.
What is the Depreciation of Asset & How is Depreciation calculated?
Each association has a fixed asset that bookkeeping teams must take into consideration when concluding the overall worth value of the association. An asset may incorporate a vehicle, machine, and equipment that is expected to be owned by an organization for a long time.
The overall value of each asset decreases as time goes by and utilization is done regularly. Thus, it is important for companies to re-evaluate their assets continuously. This is where depreciation comes into play.
As per the Investopedia, “Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits.”
There are several methods to calculate depreciation
- Straight-line method
- Double declining balance method
- Units of production method
- Sum of years digits method
However, most of the organizations follow the straight-line method. Thus here, we are explaining how this works.
In the straight-line method, you need the initial value and salvage value and useful life.
Here is the formula:
(Initial Cost - Salvage Value) / Useful Life = Annual Depreciation
Here is an example, let us say you bought a machine $50,000 and it has a salvage value of $5,000. The expected useful life is 10 years.
So, the depreciation will be:
$(50000 - 5000) / 10 = $4,500 per year.
That means each year, your asset will depreciate by $4,500.
The “salvage value,” is the amount you'd be able to get when you sold this asset.
What are the important factors when calculating depreciation?
There are three main crucial factors that help in calculating depreciation which are:
- Salvage value: - When an organization wants to remove the asset or wants to bring a new asset then they sell the asset at a low price. That is called a salvage value. However, the overall depreciation is calculated by deducting the salvage value from the overall value.
- Asset useful life: - From a company's point of view, an estimated period of time for which the asset is productive is known as the asset's useful life. Depreciation is calculated on the basis of this asset's useful life.
- Depreciation method: - As we mentioned above there are several methods available but most organizations follow the straight-line method. The second method is the double-declining balance method. It is also known as the accelerated method; it makes more depreciation on the early life of the asset.
What are the Benefits of Depreciation Tracking via Asset Management Software?
Advantages of depreciation tracking via Asset Management Software are given below:
1. Precise asset evaluation & account keeping
Precise asset evaluation and proper accounting are necessary because if depreciation is not accounted then companies may overestimate the value of assets in their balance sheets & reports - which is neither a good way of accounting nor allowed by specific provisions of the law.
As we know the value estimation of assets diminishes after some time. This can affect taxable income & resale value. Hence, depreciation calculation of assets is done after regular intervals.
So, asset tracking management software ensures accurate accounting and evaluation of assets. Moreover, it gives a fast and simple approach to fetch reports about assets and their depreciation.
2. Tax benefit
Bookkeeping books reflect the most precise asset costs likewise significant with regards to figuring out the total amount to be paid for taxable income. From a bookkeeping viewpoint, assets are the things that help in producing income.
However, as time goes by, the value of the assets is reduced. This loss is tolerated by the company and must be subtracted from the total revenue generated.
Depreciation assists associations with saving money on taxes by decreasing the total taxable earning by the proper depreciation cost of assets. The higher the depreciation cost, the smaller the taxable amount will be.
3. Well informed financial decision
The asset management software helps in making business favorable decisions that can only be achieved with software assistance.
For e.g. which asset is productive, which asset is taking more maintenance, and which needs to be disposed of. Overall, it identifies the performance of each asset.
With depreciation, organizations can easily compare the cost of an asset in a fixed asset accounting period that the asset helps to generate revenue during the same period. In simple words, it tells you about the productivity of an asset. That helps in making a business decision, such as either to keep it or discard it.
Depreciation is one of the most important parts of asset management and tracking capital asset depreciation assists companies in maintaining accurate financial records. It is also helpful in making a business decision easily, tax savings and error-free tax filing.
Keeping manual depreciation track of assets and equipment can be a daunting and exhausting task. However, asset management software automates the process and provides accurate depreciation tracking as well.
Frequently Asked Questions (FAQs)
1. What is the accelerated depreciation method?
According to WallStreetMojo,
Accelerated depreciation is referred to those methods where the asset cost is depreciated at a faster rate than the straight-line method and therefore it leads to larger depreciation expenses in the earlier years than the later period of the asset's useful life. The main purpose of using this method is the belief that assets are more productive in the early years than later years.
2. How often do I calculate asset depreciation?
There are probably two methods for this, first is to ascertain the values each time you do taxes and keeping those values promptly close by. The second method is you can use asset management software that will track depreciation for you.
All you have to do is, simply put the asset's cost, its useful life, and salvage value into the system software, and it will automatically calculate it for you. Therefore, it makes upkeep planning simpler because you have all the upkeep information on your fingertips.