Depreciation of Fixed Assets
Depreciation is the process of allocating the cost of a tangible asset over its useful life. This process allows the costs of purchasing capital-intensive items to be spread out over several years, which helps companies to accurately reflect the cost of these items. Businesses use depreciation to maintain accurate financial records, calculate their taxable income and determine the value of the fixed assets they hold.
For accounting purposes, companies must record depreciation because it is the only way to spread out the cost of a fixed asset over its useful life. This is important for properly tracking expenditures and earning performance. By distributing the cost over several years, companies can more accurately determine accurately what their expenses has been over the period of time, as well as the actual performance of the asset.
Depreciation also affects the taxes that companies owe. Basically, the more money a business invests in fixed assets, the lower their taxable income for the current year will be. This is the result of the ability to write-off the cost of the fixed asset over its useful life. The amount of the write off each year is a deductible expense. This essentially lowers the amount of income subject to taxation.
Finally, companies use depreciation to determine the value of the fixed assets they own. Since these fixed assets will likely be used over several years, they will eventually depreciate in value. By calculating the amount of depreciation taken on an asset, companies can get a much better idea of its current value. This is important for calculating net worth, as well as for providing information on the strength of corporate resources.
Depreciation plays an important role in maintaining accurate accounting records and calculating the taxable income of a business. By tracking the depreciation on fixed assets, companies can accurately determine the cost of these items, their value and the impact they have on taxes owed. This helps provide important insight into the financial position of a company.
