Everything You Need to Know About Asset Depreciation

Analyzing how your organization manages depreciation is crucial, as it is a significant component of the expenses on a company's income statement. Accurate bookkeeping and expense management are essential for maintaining financial health, but calculating depreciation can often be a complex and time-consuming task.

This is where the importance of depreciation tracking through asset management software like Asset Infinity comes into play. By automating and simplifying the depreciation process, Asset Infinity ensures that your organization maintains precise records and saves on expenses, ultimately providing a clearer financial picture for investors, analysts, and stakeholders.

What is Asset Depreciation and How is It Calculated?

Every organization owns fixed assets that must be accounted for when determining the overall value of the business. These assets may include vehicles, machinery, and equipment that are expected to serve the company for a long time. However, the value of these assets decreases over time due to regular usage, making continuous re-evaluation necessary. This decrease in value is what we refer to as depreciation.

According to 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 for calculating depreciation, including

- Straight-line method

- Double declining balance method

- Units of production method

- Sum of years digits method

Most organizations prefer the straight-line method for its simplicity. Here’s how it works:

Straight-line Method Formula

(Initial Cost - Salvage Value) / Useful Life = Annual Depreciation 

Example

Let’s say you purchase a machine for $50,000 with a salvage value of $5,000 and an expected useful life of 10 years.

Depreciation per year = $(50,000 - 5,000) / 10 = $4,500

This means your asset will depreciate by $4,500 each year.

Important Factors in Calculating Depreciation

When calculating depreciation, three critical factors come into play:

1. Salvage Value

The salvage value is the estimated residual value of an asset at the end of its useful life, after it has been fully depreciated. This value is deducted from the asset's initial cost to determine the total amount that will be depreciated.

2. Asset Useful Life

This refers to the estimated period during which an asset is expected to be productive and contribute to the company’s operations. Depreciation is calculated based on this useful life.

3. Depreciation Method

While the straight-line method is the most commonly used, some organizations may opt for accelerated depreciation methods, such as the double-declining balance method, which results in higher depreciation expenses in the earlier years of the asset's life. 

Benefits of Depreciation Tracking via Asset Management Software

Using asset management software like Asset Infinity to track depreciation offers several advantages:

1. Precise Asset Evaluation & Accounting 

Accurate asset evaluation is crucial for proper accounting. If depreciation is not accurately accounted for, companies may overestimate the value of their assets on balance sheets, leading to incorrect financial statements. Asset Infinity ensures that depreciation is calculated regularly, providing precise asset valuations and easy access to detailed reports.

2. Tax Benefits 

Depreciation affects taxable income by reducing the overall value of assets, which in turn decreases the taxable amount. Asset Infinity automates the depreciation calculation process, helping organizations save on taxes by accurately reflecting asset costs and reducing taxable earnings.

3. Informed Financial Decisions 

Asset Infinity provides valuable insights into asset performance, enabling organizations to make informed decisions. By tracking depreciation, businesses can compare the cost of an asset with the revenue it generates, helping to determine whether to retain or dispose of an asset. This leads to more strategic and financially sound decision-making.

Conclusion

Depreciation is a critical aspect of asset management, and tracking it accurately is essential for maintaining financial integrity. With Asset Infinity, organizations can automate the depreciation process, ensuring precise calculations and error-free tax filings. This not only simplifies financial management but also supports better business decisions and tax savings.

Manually tracking depreciation can be daunting and prone to errors, but with Asset Infinity’s asset management software, the process is streamlined, accurate, and efficient.

Frequently Asked Questions (FAQs)

What is the accelerated depreciation method? 

 According to WallStreetMojo, accelerated depreciation refers to methods where the asset cost is depreciated at a faster rate than the straight-line method, resulting in larger depreciation expenses in the earlier years of the asset's life. This approach is based on the belief that assets are more productive in their early years.

How often should I calculate asset depreciation? 

Depreciation can be calculated either during tax filing periods or continuously using asset management software like Asset Infinity. By inputting the asset's cost, useful life, and salvage value into the software, depreciation is automatically tracked, making upkeep planning simpler and more efficient.