How does depreciation help in your business?
What is depreciation?
The monetary value of an asset decreases over a period for which that asset is usable in the business. For example, Equipment, machinery, and currency will likely depreciate over time.
The primary journal entry for that is
Debit: The depreciation account shows as an expense in the income statement.
Credit: It accumulates in the asset account in the balance sheet, reducing the value of the fixed assets in the balance sheet.
Maintaining the depreciation accounts by the accounts department will show the aging of your assets in your business.
Where is depreciation tracked?
Usually, depreciation is found in one or two places first in the income statement as an expense, reducing the profit. Secondly, the balance sheet’s fixed assets section shows the assets’ real value because the calculation accommodates the accumulated depreciation less the original value of the purchases at a reporting period.
The balance shows the total depreciation total to represent the asset’s reaming value. The financial statement shows the amount only for the reporting period to arrive at the business’s correct amount of profit or loss.
The following depreciation will show how it helps you see the actual value of assets at a certain period after the purchase.
Besides, you will know the net value of the business by calculating the net worth of assets. You will realize that your values decrease annually and cannot surpass your competitors. Therefore, it is one of the ways to motivate you to increase productivity in the business. Besides, you will discover if an asset drops in value quicker than expected.
Some of your assets may outlive than expected but might cost you more maintenance, which will help you trash it and go for a profitable purchase.
How does depreciation help in your business?
The company’s balance sheet will show the overall picture of the value of all your investments. If you have many assets that need the calculation of all of them, you will attach a separate sheet with accounting for the balance sheet’s support, but the balance sheet shows on a final figure at reporting period. If the estimated depreciation is lower than what is currently happening, you can investigate possible causes and fix them before they get too out of hand. Preventing major problems will save thousands of dollars and stop crises from hurting your business.
Methods of depreciation
The small business mainly uses the straight-line method to calculate depreciation.
I will show an example here for the straight-line method.
Cost of an asset you bought for $ 100,000.00
Say you can use it only for five years, so the deprecation will be $2000 yearly.
If you prepare a balance at the end of the 4th year, you will show the asset like this:
Asset $100,000.00
Less Depreciation
$ 80,000.00
The remaining value of the asset is $20,000.
Another method is the reducing balance depreciation method. When you buy an asset, a percentage of depreciation starts from the cost in the first purchase period and then goes down to a smaller amount until the purchase is of no use.