While uttering the word, deprecation, people consider it a negative term used in the field of accounting. However, it is not true but, it is a significant aspect of financial management that every organization needs to deal with it. In fact, deprecation is one of the crucial expenses as businesses have to mention it on the income statement.
In this way, deprecation enables the companies to maintain their bookkeeping record. Is this something novel to you? The article aims to help you understand essential conceptualization of asset deprecation in business. Keep reading the article to get some in-depth insights!
What is Asset Depreciation?
Every organization has fixed assets both tangible and intangible. The bookkeepers and accountants have the responsibility to record and calculate the value of assets for running business processes. According to the Investopedia,
“The term depreciation is used to allocate a cost with the assets (tangible and intangible) for estimating its usefulness, benefits, value and life expectancy. It’s an accounting method for assisting the companies to assess the revenue depending on assets.”
However, the value of assets decrease over the time if not managed properly. So, organizations used deprecation to utilize the assets for optimal regulation. For example, if a company have some technological equipment, it is imperative to replace the machines and upgrade the technology for maintaining the asset value.
Although, governments issue the rules for deprecation within the businesses, accountants play a critical role in policies regulations. For this, businesses heavily rely on the best accounting firms in Dubai for managing their financial recordkeeping. It enables the businesspeople to calculate deprecation accurately.
Comprehensive Guide to Asset Deprecation in Business
Nevertheless, deprecation is often misunderstood for decreasing value but it is not true. It is imperative for the businesses to use asset deprecation for ensuring a balanced approach towards financial management. It has a significant impact on your business.
What assets can be depreciated?
According to the guidelines set by Internal Revenue Service (IRS), the businesspeople can only deprecate the assets that comply with a certain criterion. For instance, if you want to deprecate a business asset, you should evaluate the following:
- Do you own this asset?
- Do you use this asset for income production or business operation?
- Have you determine usefulness of this asset?
- Will it last for a considerable period such as one year?
Schedule for deprecation
It is imperative to understand that organizations must retain an asset for a certain period of time before deprecating. Once, you have decided for deprecation, you need to fill a table containing the following information known as the deprecation schedule:
- A detain information describing the asset
- The purchase date information
- The price that a company paid for buying the asset
- The expected life of usefulness
- The method for deprecation
- The value for scrapping the asset known as salvage
Types of depreciation
Assets are the treasure for every organization. Owing to this, businesspeople pay higher attention to deprecate the assets in the best ways. It is significantly helpful in tax returns. So, if you are running a business in UAE, you should consider deprecation for calculating VAT.
Business companies can do deprecation using various methods for financial statements, or take deprecation over tax returns. It is imperative to understand the methods before making a decision. Consider the types:
- Straight-line depreciation is a common method used for fixed assets as it splits the value in a balanced way over the life expectancy and usefulness.
- Double-declining balance depreciation is a complex method used to estimate the deprecation value of an asset right from the day when an organization bought or owned it.
- Sum-of-the-year’s-digit (SYD) is a method for asset depreciation. It helps the companies to estimate the cost of an asset by comparing the early day’s usefulness with the later days of asset value based on usefulness.
- Unit of production depreciation method is used to estimate the cost of an asset based on depreciated value. It calculates the cost based on the remaining life usefulness of an asset.
Essential factors for calculating depreciation
Deprecation of an asset depends on a number of factors. It is because the business companies have to deal with effective financial management. Owing to this, companies consider the documented information for assets deprecation while consulting with the best accounting firms in Dubai. Consider the factors important for deprecation:
- The businesses must consider the salvage value
- The businesspeople evaluate the useful life value of an asset
- The companies must consider the depreciation method
Asset deprecation is important for businesses!
Summing up, assets are important for companies to execute operations and manage income. Owing to this reason, the business people pay higher attention to ensure the effective management of assets. Then comes a time for asset depreciation as everything has a life expectancy – make it a successful transition from deprecation to retention!