It’s a common practice for companies to purchase items that are considered depreciable assets. These are long-term assets that are used in the operations of a business. Examples of depreciable assets include machinery, fixtures, and building materials. However, understanding how depreciable assets work is key to making sound financial decisions.
What Is Depreciation?
Depreciation is defined as the gradual, systematic, and rational allocation of cost of fixed assets over their useful lives, resulting in a reduction of asset value. Depreciation is an accounting term that is used to spread out the cost of an asset over its expected life. Different methods of depreciation may be used, depending on the type of asset in question. Some common methods of depreciation include the straight line method, the sum-of-the-years digits method, and the double-declining balance method.
Why Does Depreciation Matter?
The purpose of depreciation is to allocate the cost of an asset over its useful life. This can help to reduce an organization’s taxable income, which can result in lower taxes and more manageable expenses. It also improves the accuracy of financial statements since the cost of an asset is allocated throughout its lifetime rather than as a single expense.
Making Depreciation Work for Your Business
Making depreciation work for your business can result in major financial benefits. When it comes to capitalizing on these benefits, business owners should focus on managing their depreciation expenses strategically. This includes ensuring a thorough understanding of the depreciation rules and regulations, monitoring the depreciable assets regularly for accuracy, and selecting the method of depreciation that best suits the company’s financial objectives. In the end, properly understanding and using depreciable assets can have a major impact on a company’s financial success.