Depreciation is a tax and accounting method that is used by businesses to account for assets, especially large assets like equipment, land, and automobiles. Depreciation allows businesses to account for the slow degradation of the equipment as it is used throughout its life. A value is assigned to the asset and gradually expensed throughout the years it is used. This is designed to accurately reflect the usefulness of the object to the business, and therefore its value. There are several advantages to this system.
If a business had to account for the entire expense of major assets whenever it bought them, these expenses would be a major hit to business finances in the year they occur. While the business will actually have to pay for the asset in some way, recording a large expense on the books will make its revenue stream appear much lower to outside observers. By using depreciation, businesses can make their revenue seem greater.
The reverse of the revenue advantage comes in the form of taxes. The more revenue the business records on its books, the more taxes it has to pay. The more the expenses of its assets take up the book value revenue, the lower the taxes will be. Fortunately, there are depreciation methods that allow businesses to account for most of the asset expense within the first few years of its use, thereby receiving the tax benefits associated with recording the expense.
Ease of Use
Depreciation methods are very easy to use because of their clear categories and rules. There is a set number of depreciation methods to choose from in the United States, and a list that shows businesses how long the lifespan of particular assets should be. This makes it very easy for accountants to create depreciation schedules and compare different plans to come up with the best one.
Depreciation applies to many different assets and projects, more than some businesses realize. An improvement project, like repaving a shipping yard, can be depreciated as the new surface wears down. Many other materials and intangibles like software and copyrights can also be depreciated.