Businesses across all industries need holistic accounting practices to get a clear image of their finances. However, one important aspect of accounting that many companies neglect taking into account is depreciation. Tracking asset depreciation doesn’t have to be a long and arduous process. Getting the right software program can help you track how depreciation affects your tools, equipment, and machinery without taking dozens of hours away from your workflow, all while improving the accuracy of your financial reporting, taxes, and audits.
Businesses across all industries need holistic accounting practices to get a clear image of their finances. However, one important aspect of accounting that many companies neglect taking into account is depreciation. Most businesses own long-term assets that they use for years. These assets go down in value over time as they age and are used. This process is called depreciation. Most businesses use depreciation to deduct the cost of their long-term asset over the time in which they use it; tax purposes allow businesses to deduct these costs over time under business expenses as long as they follow the IRS guidelines in doing so. This allows many companies to continue writing off the business expense over time in smaller amounts instead of in one year as a lump sum. Along with being a valuable accounting practice, depreciation helps businesses see how much of the market value they’ve lost for each asset. The easiest way to demonstrate this is to use the housing crisis as an example. Before 2008, a home in Miami would have sold for $500,000. After the housing crisis hit, that same home would sell for $350,000, depreciating by 30% in one year. As you can see, depreciation is a vital part of not just running your taxes properly each year, but also figuring out the total worth of your business, including the assets which are losing their value. When you don’t include depreciation in your numbers, you could easily run into several problems which could cripple the growth and effectiveness of your business.
What Happens if You Don’t Use Depreciation
Neglecting to account for depreciation in your business’ books can have several negative impacts on your business. Along with missing out on tax deductions, it can completely mess up your accounting process. Depreciation actually has a huge impact on a lot of your asset information. It determines asset lifespan, value, and the overall value of your business.
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