Once you install the Asset Management Software and start keeping a track of all your assets, you feel that the employees are doing a great job by understanding the whole profile and software. But still there might be something that you are not paying attention to, which could lead to heavy future losses. Depreciation is directly related to your assets and hence you should never overlook them. With the help of Fixed Asset Depreciation one will excel undoubtedly. Let us understand what Depreciation is.
Asset Depreciation: the loss of value of any asset due to regular wear-tear of the asset there is a reduction in the overall value of the asset which we call as Asset Depreciation. At the end of it, the asset will lose its complete value and become scrap.
Calculation of Asset Depreciation becomes important if we think of saving money as you can use a tax write off by showing depreciation on your assets. This is a process which mostly all the businesses use who take smart financial decisions.
The factors that are important when asset depreciation is conducted are:
- Useful Life: The time that a company thinks its asset will have some value is its useful life. Depreciation is conducted on this life only.
- Value of Asset: Knowing the value of asset is important to judge at what price the depreciation would be conducted. Scrap value is generally reduced from the cost price of the asset to know exact value of the asset.
- Method of depreciation calculation: Calculating depreciation, let us understand by taking an example!
Let us assume we have an asset worth 50$. The useful life of this asset is 5 years. The level at which it depreciates is 10% every year. The method that we are using to calculate depreciation is Straight line method. Like this we can distribute the total depreciation incurred equally in each year that is 5$.
What is Fixed Asset Depreciation?
Calculating depreciation on any Fixed Asset that is in possession of your organization is known as Fixed Asset Depreciation. It is a calculated expense being taken care of throughout the life of that asset.
It reflects how an assets value is used over time. Fixed assets, such as equipment and vehicles, are major expenses for any business. After a certain period, these assets become obsolete and need to be replaced. Assets are depreciated to calculate the recovery cost that is incurred on fixed assets over their useful life.
What are the various benefits of depreciation?
- Helps in writing off Asset Value: When an organization plans to calculate depreciation, they calculate the value of Asset. This value is generally calculated after reducing the salvage value from the cost of that asset. If we have this data present with us it becomes very easy to write off the whole value of the asset and then to divide it throughout the useful life.
- Helps in Tax Reduction: There are tax rules that make depreciation tax deductible. The greater the depreciation expense the more you are benefitted, as it lowers the overall income which increases your tax savings. Depreciating assets will allow the business to write-off the tax that is payable on the fixed assets as it is an expense which we deduct from the revenue.
- Correct valuation of Asset: With the help of depreciation, one can find out the real worth of any asset. Value of any asset is calculated by finding out its useful life and then reducing the salvage cost from the cost of that asset. We then receive an amount which we can distribute all over the useful years of that asset.
- Recover the cost of Asset: With the help of Fixed Asset Depreciation one can easily identify the value of asset with which the true cost of Asset can be recovered by utilizing the asset to its most throughout its useful years.
Why depreciation is important?
A wise financial decision is to recover the cost of the asset, as that cost can be divided throughout the useful years of those assets. When an organization is aware of the valuable life of the asset is becomes very easy to take financial decisions of how and when to buy an asset.
Calculating depreciation directly affects your business in a positive way. When you just start keeping a note of depreciation on your assets at first you may find it difficult but with the help of an Asset Management Software you will be able to calculate depreciation very easily. It lowers the cost, and it enhances the value of your business. And that is the reason why one must give it a try.
For a proper calculation of depreciation one must know the actual value of your asset for that you should always keep the invoice of asset with you from the time of purchase so that actual value can be calculated. You can also use that invoice to get tax rebate. To make the most of your assets, you must record and value them accurately.
If you think that we calculate depreciation for all the assets present in the organization then you are wrong. Assets that do not value much and assets that do not last longer than a few months, depreciation is not calculated on them.
Understanding the importance of asset is important to increase your potential savings and to invest in assets or to keep aside a set amount to purchase more assets. Fixed assets majorly represent the value of whole business, hence it is very important to keep that information true to nature. A business should always keep accurate asset record as it shows the financial position of your business. Representing true information will increase the goodwill and positive attitude of customers towards your business.
The thought of depreciation calculation can be daunting for newcomers. If you are confused what you should apply depreciation to and what not to get in touch with Asset Infinity now to solve all your problems so that you sail easily!