The depreciation literally means ‘value of anything going down’. It is commonly used to refer decreasing value of the assets over the time initiated by multiple factors including tear and wear. Let’s take an example if a widget manufacturing machine. The widget manufacturing machine is said to be depreciated when it starts producing less widget in a year as compared to the number of widget produced in the past years. The value of a car is said to depreciate when there is a fault in the transmission or the vehicle get involved in an accident.
When it comes to the field of accounting, depreciation is associated with the allocation of an asset cost over a specific period of time. In case, a company wants to purchase an asset, like an equipement of any other machinery – it can easily skewer the statement of the income and as a result it can cause confusion. Rather than adding a single huge amount – the purchases can be smoothed by expensing the asset and showing the value over the time. If the business is in the United States – the depreciation taxes are deducted in the taxes.
Why Depreciation Is Important?
Depreciation is beneficial for the companies as accurately provide the description regarding the senses associated with the use of asset and compared it to the revenue that asset bring for the company. The absence of the implementation of depreciation can result in under-stating of the total expense of the asset and as a result provide misleading and incorrect financial history.
The concept of depreciation is also important because it can help the company to identify the correct value of an asset. Even though at the initial stages, the cost of an asset is high – it decreases periodically with the wear and tear during a specific period and hence that taxes are adjusted as per the current value adding the loss of asset worth. Companies can find an asset’s net book value by subtracting the asset’s overall depreciation expense from the cost when the asset was purchased.
The concept of depreciation help the companies in recovering the cost of an asset when it was first purchased. Depreciation help the companies to recover the purchase cost of the asset. This can help thhe companies to replace future assets by using the accurate amount of the revenue. There are tax rules that make depreciation tax deductible. A greater depreciation expense lowers taxable income and increases tax savings.
MACRS Depreciation Table
The Modified Accelerated Cost Recovery System (MACRS) is the tax depreciation system currently being used in the United States. It involves the recovery of tangible cost of a property over a specific period of time. The lives of the properties are mainly specified by the Internal Revenue Code. The deduction of taxes in term of depreciation is a practice adopted since the idea of the inception of income tax. Before the year 1971, the tax deductions were computed under different classes of lives and then the Congress introduced Class Life Asset Depreciation Range (ADR) for the purpose of the simplification of the calculations and to uniform the process involved. Under the management of ADR, the IRS have the authority to assign and finalize the lives of an asset considering the use and the nature of the asset.
There are various means by which the taxpayers can depreciate assets. These methods mainly include sum of year digit, straight line, or declining balance. Vintage accounts are used to track, monitor, and accumulate the depreciation in a specific year. Vintage accounts for a specific year are could be modified by the tax payer half yearly so it should be convenient for the favorable results. In the year 1981, the depreciation was again modified by the congress that provided shorter recovery cost. Under the guidelines of Accelerated Cost Recovery System (ACRS), asset groups were assigned which was based upon the old ADR lives of the assets. Another change introduced at this time was the calculation of the assets by the taxpayers.
Depreciation through straight line method involves choosing to depreciate the asset at an equal amount for each year over the total life span of the asset. Here is the formula and its explanation in detail.
The first step is to subtract the asset’s salvage value from the total cost you can obtain the amount that can be depreciated. Now this amount will be divided by the useful years of the asset. Now the answer will be divided by 12 to determine the monthly depreciation of an asset.
Even though there are multiple ways to calculate depreciation, there are three major ways you should about. Following are the most common and useful methods utilized to calculate depreciation.
Straight-line Depreciation Method – simplest and most used method of calculation depreciation.
Double Declining Balance Method – results in larger amount expensed in the earlier years as opposed to the later years of an asset’s useful life.
Units of Production Method – depreciates assets based on the total number of hours used or the total number of units to be produced by using the asset, over its useful life.
The importance of depreciation in any business cannot be denied. It can help the business to calculate the actual value of the asset and show it in tax return file. Without the concept of depreciation, there will be huge losses for the business and hence it is important to calculate the depreciation accurately. Rather than going through the tiring process of calculating it via paper and paper, you can get accurate results through using the depreciation calculator. Now the answer to your business accounting is one click away and it can make a significant difference when you will file for the tax return. Not only this calculator will save your valuable time, it will help you to do it accurately every time.