why do we record depreciation in accounting
To ascertain the net earnings/profit for an accounting period, depreciation need to be computed. Depreciation normally constitutes a major part of the expenses of the business. As the business buys fixed assets, it expects the fixed assets over the useful lives are able to generate the necessary revenues for its business. Whilst revenues being earned and if there is no allocation of depreciation cost to match these revenue, income will then be overstated. Depreciation therefore follows very closely to
the matching concept The fixed assets in the Balance Sheet will be overstated if depreciation is not provided for.
Only that part of the costs of fixed assets that have not expired should be reflected in the Balance sheet otherwise the financial statement will not reflect a true and fair view; If depreciation is not provided for and assuming if the whole profits were withdrawn during the life of the asset, additional capital would have to be raised when it is time to replace the fixed assets. By charging depreciation against profits, the ultimate residual profit available for distribution is lowered and that funds are retained in the business for future replacement.
Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear,Pdepletion or other such factors. P When you purchase an asset for your business and place it in service you are allowed to write off a portion of the purchase price each year as depreciation expense. For example, business furniture is most often depreciated over seven years so if you purchase a $700 desk on January 1st of 2008 you may take $100 worth of depreciation in 2008 and then an additional $100 per year for the next six years.
P At the end of seven years you have taken the value of the asset to zero in this example. Depreciation is nothing more than an estimate that is made in accordance withPvarious guidelines. Various methods of accelerated depreciation are available to allow business owners toPdepreciate their assets earlier;Paccelerated depreciationPrules are often put into place by our elected officials in order to encourage business owners to spend money on equipment which in turn increases spending.
Depreciation is an expense that will lower your companies net income. P The lower your net income the less you will pay in income taxes. P Depreciation is something that you and your accountant must consider carefully when analyzing your tax situation. P It is not always best to take accelerated depreciation! PP Mike Sylvester, CPA/ABVP
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