Depreciation
The concept
of
depreciation
is really
pretty
simple. For
example,
let’s say
you purchase
a truck for
your
business.
The truck
loses value
the minute
you drive it
out of the
dealership.
The truck is
considered
an
operational
asset in
running your
business.
Each year
that you own
the truck,
it loses
some value,
until the
truck
finally
stops
running and
has no value
to the
business.
Measuring
the loss in
value of an
asset is
known as
depreciation.
Depreciation
is
considered
an expense
and is
listed in an
income
statement
under
expenses. In
addition to
vehicles
that may be
used in your
business,
you can
depreciate
office
furniture,
office
equipment,
any
buildings
you own, and
machinery
you use to
manufacture
products.
Land is
not
considered
an expense,
nor can it
be
depreciated.
Land does
not wear out
like
vehicles or
equipment.
To find
the annual
depreciation
cost for
your assets,
you need to
know the
initial cost
of the
assets. You
also need to
determine
how many
years you
think the
assets will
retain some
value for
your
business. In
the case of
the truck,
it may only
have a
useful life
of ten years
before it
wears out
and loses
all value.
Straight-line
depreciation
Straight-line
depreciation
is
considered
to be the
most common
method of
depreciating
assets. To
compute the
amount of
annual
depreciation
expense
using the
straight-line
method
requires two
numbers: the
initial cost
of the asset
and its
estimated
useful life.
For example,
you purchase
a truck for
$20,000 and
expect it to
have use in
your
business for
ten years.
Using the
straight-line
method for
determining
depreciation,
you would
divide the
initial cost
of the truck
by its
useful life.
The
$20,000
becomes a
depreciation
expense that
is reported
on your
income
statement
under
operation
expenses at
the end of
each year.
For tax
purposes,
some
accountants
prefer to
use other
methods of
accelerating
depreciation
in order to
record
larger
amounts of
depreciation
in the early
years of the
asset to
reduce tax
bills as
soon as
possible.
You need,
additionally,
to check the
regulations
published by
the federal
Internal
Revenue
Service and
various
state
revenue
authorities
for any
specific
rules
regarding
depreciation
and methods
of
calculating
depreciation
for various
types of
assets.
