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Every business and company holds assets and liabilities. Assets are crucial for a company because that is what they rely on for the future of their business. Over the life term of the asset, its value is considered as the expense for the business. To understand more about the asset depreciation, read the post further. Every crucial information that you should know about asset depreciation is stated below.
What is Asset Depreciation?
The depreciation is defined as the reducing value of a fixed asset owned by a company over time. A business doesn’t record the whole deduction cost altogether once in a year, but rather, it is recorded at frequent intervals over time. The written asset depreciation helps to have more control over the finances of a business. Recording business’s asset depreciation is imperative for every business.
What Assets Can Be Depreciated?
A business can depreciate both tangible and intangible types of assets like machinery, vehicles, equipment, computers, furniture, computer software, patents and copyrights. The land is the only kind of fixed asset of a company that cannot be depreciated over time. As time passes, the value of land will only get appreciated.
Example of Depreciation: If the business buys a car worth CA$30,000 and its usage is expected for 10 years, then the value will depreciate the asset with the depreciation expense of CA$3,000 every single year for a time of 10 years.
Methods to Calculate Depreciation
For calculating the asset depreciation, three common methods are generally practised - the straight-line method, units of production method and double-declining balance method.
Three main inputs are required for the calculation:1) Useful Life - This is the period of time in which the company considers the asset to be productive.
2) Salvage Value - When the fixed asset is sold after it’s useful life, the reduced amount at which the company will sell it, would be considered as salvage value.
3) Cost of the Asset - This aspect includes taxes, shipping and preparation or setup expenses.
The three methods used for calculating are explained below:
1) Straight-line Method
This is the simplest and most commonly used method to calculate the expenses of depreciation. The method involves a simple allocating of the same depreciation rate every year over the useful life of the asset. The formula for straight-line depreciation is:
Annual Depreciation Expense = (Asset Cost - Residual Value)/Useful life of the Asset
Example - If a company purchases machinery valued at $10,000, with a residual value of $2,000 and it has a useful life of 10 years. Then:
Annual Depreciation Asset = (10,000 - 2,000)/10 = $800
With this, the company will enter CA$800 under the Depreciation Expense over the machinery’s useful time of 10 years. The depreciation expense is stated under the income statement as the reduction in revenues.
2) Units of Production Method
Unlike the straight-line method, this is a two-step method. Under this method, an equal amount of expense is given to each unit that is produced or service rendered by the asset. This makes the method useful for the production line. The calculation in the method is based on the output capability of the asset instead of the number of years.
The two steps:1) Calculate Per Unit Depreciation:
Per Unit Depreciation = (Asset Cost - Residual Value)/Useful life in Units of Production2) Calculate the total depreciation of actual units produced:
Total Depreciation Expense = Per Unit Depreciation x Units Produced
Example - An XYZ company buys a piece of machinery for CA$4,000 with an expected production of 18,000 units over its useful life, and it has a residual value of CA$400. Its output is 400 units.
Step 1 - Per Unit Depreciation = (4,000 - 400)/18,000 = $0.2
Step 2 - Total Depreciation Expense = 0.2 x 400 = $80
With this the depreciation expense is shown CA$80. The unit depreciation that is found, that same can be applied for future output runs.
3) Double Declining Balance Method
Among the others, this is also one of the common methods that company use to derive the depreciation expense of a fixed asset. This method is a type of acceleration method. It calculates the depreciation expense high in the first year and reduces the expense of depreciation in the following year.
Depreciation = 2 x Straight Line Depreciation Present x Book value at the beginning of the accounting period
Book Value = Cost of the Asset - Accumulated Depreciation
Example - Company XYZ buys machinery on April 1, 2016, at the cost of $10,000. The machinery is predicted to have a useful life of 5 years, and the salvage value is $1,400. The company will consider depreciation for the nearest month. Now, calculate depreciation expenses for years 2016, 2017, 2018 with the declining balance method.
Useful Life = 5
Straight line depreciation percent = ⅕ = 20% per year
Depreciation rate = 20% x 2 = 40% per year
Depreciation for the year 2016 = $10,000 x 40% x 9/12 = $3,000
Depreciation for the year 2017 = ($10,000 - $3,000) x 40% x 12/12 = $2,800
Depreciation for the year 2018 = ($10,000 - $3,000 - $2,800) x 40% x 9/12 = $1,680
The depreciation value for the year 2020 would be CA$112, it will keep the book value same as the salvage value. (CA$1,512 - CA$1,400 = CA$112) after this calculation the depreciation recording should stop.
The asset depreciation is a must for every business because some assets taxes may be deducted immediately, and some have long life term whose taxes are deducted over the years of life. You only stop the depreciation of an asset when it has reached its useful life. To handle the assets and other accounting for your business, you can hire our accountants.
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Almost every firm wishes that 2020 is their year, and they make the most of it. Also, we are sure that many firms made numerous wishes and resolutions last year, too, but failed to fulfil them. There are multiple reasons why they might have failed. Some of them debatable, while the others being obvious blunders. Almost every firm wants to have their accounts on track so that they can understand what mistakes they are making and eventually double up on their profits. But for this to happen, there are multiple things that a business needs to do from an accounting point of view. These things can totally be your new year’s resolutions. So in this article, we are going to discuss just those things that can be your accounting resolutions for the year 2020 with the ways you can actually fulfil them.
1) Conduct a Complete Financial Review
Yes, we are aware that this is not the financial year-end, but performing a quick review of your accounts would not harm. All you need to do is go through your accounts, check for all the sales receipts and sales notices, go through all of yours and your business’ professional expenditure and see whether they add up or not. In case they are not adding up, you may require to call up a chartered accountant from your vicinity. The reason why we suggest that you hire a professional chartered accountant is that they are trained in these things and they can pin down the reasons as to why your accounts are not matching with your expenditure. Therefore, saving your firm from a lot of trouble in the future.
2) Understand Your Tax Expenses
It’s always good to know beforehand what is the amount you will have to pay the government as and when you near the financial year-end. So the next time you get the opportunity, call up your chartered accountant or hire a new accountant for help. What a chartered accountant would do for you is they can go through your details to understand anomalies, if any. Therefore, assisting your business to thrive and you have a hassle-free year-end.
3) Focus on Customer Service
All the firm requires to do in order to thrive is to make their customers happy. This is because they are the reason why your firm is operational in the first place. So when you conduct your next financial meeting, consider whether your sales is falling because of sloppy customer service. If that is the reason for your firm’s near downfall, always consider revamping your customer services section. This goes on to assist your firm to maintain its accounts and keep making profits to have a great year ahead. So this is one of the most important resolutions for your firm to make in 2020.
4) Update Accounting Systems
Your accounting systems are just as important as the sales aspect. This is because if your accounts section is not up-to-the-mark, you will face a major challenge when you are dealing with year-end tax payments. This is because if you don’t have a clear idea of what happened during the year in written format, you will be left alone, spending days and days on end trying to understand how your firm operated over the last year. So yes, do get in touch with an external accountant to look at your systems and give you a bird’s eye view of the challenges faced by your firm. This will just go on to assist your firm in thriving through ages.
5) Be Aware of Tax Laws
Often companies make the accounting mistakes of not being aware of the tax laws. When this happens, the companies are left hanging in the middle. This is because they are not aware of the recently changed tax laws. Eventually what happens is they don’t realize whether the current tax law will affect their operations in a positive or a negative way. So always ensure that you are up to date with the constantly changing tax laws. If in case you are not able to understand any of the laws, do not hesitate to get in touch with an accountant. This is because they are professionals and are aware of the constantly changing tax laws. They will be better able to make you understand how the current law will be affecting your business and how you can avoid getting your firm into trouble.
6) Keep a Track of Your Finances
This is of high importance for a multitude of reasons. Some of these reasons include you having an effortless year-end tax-paying time. A way to keep track of your expenses is making electric copies of your expenses and upload them directly to your accounting software. Doing so saves a lot of time for you when you actually have to start with your year-end tax-paying season. If you have paper receipts, you can always opt to click a picture of those receipts and upload them directly to the software. If in case you find this to be too consuming for you, always opt to get in touch with professional chartered accountants so as to help you in understanding how you can keep track of your finances.
All we suggest is making the right decisions so as to have the right type of 2020. If accounts of your firm still challenge you, always consider getting in touch with a professional chartered accountant in your vicinity so as to help you with the same.