February 24, 2020
Understanding Depreciation and Balance Sheet Accounting
Depreciation is part of tracking assets. Integrating depreciation and balance sheet accounting will help you take your asset tracking game to the next level.
Instead of keeping asset depreciation value a mystery, take more time to see how your assets are aging. If your accounting department isn’t already keeping an eye on depreciation, it’s time to make it part of their job.
Where is Depreciation Tracked?
Depreciation is typically tracked one of two places: on an income statement or balance sheet.
For income statements, depreciation is listed as an expense. It accounts for depreciation charged to expense for the income reporting period.
On the other hand, when it’s listed on the balance sheet, it accounts for total depreciation instead of simply what happened during the expense period. Your balance sheet will record depreciation for all of your fixed assets. This means you’ll see more overall depreciation on your balance sheet than you will on an income statement.
Here’s the difference. Let’s say you acquire a large piece of equipment that cost you $120,000. It has a useful life of five years, which means it depreciates at $2,000 a month.
You’re looking at your company’s income statement for July of the third year you’ve had this machine. For the month of July, this equipment’s depreciation expense is $2,000. However, your balance sheet will show an accumulated depreciation value of $60,000, since that is what has added up in the 30 months you’ve had this asset.
Why Depreciation and Balance Sheet Over Other Places?
Tracking depreciation and balance sheet together helps you get a complete picture of how your assets are depreciating. You can see what’s happening in a month to help you make sure you bring in the right amount of income during that time period by only looking at income statements.
However, if you want to get ahead of your competition, you need to focus on the overall picture. Knowing where your assets will be valued a year from now will help you determine your business worth. Seeing your company’s net value decline over time is a great motivator for making profit generating aspects of your business more of a priority. It’ll also help you identify any assets that are depreciating too quickly, or that are holding up more than you expected.
Having an overall picture of your asset situation will also help you identify which items need maintenance and which ones aren’t worth holding onto anymore. If you see that some assets have outlived their expected lifespan and are costing you thousands in upkeep, it’s time to trash it for something that will be worth the effort.
Your company’s balance sheet is a great place to monitor the overall status of your assets and ventures. Keeping it all in the same place helps you identify patterns that would be harder to spot otherwise. If you see that the estimated depreciation is lower than what is currently happening, you can investigate possible causes and fix them before they get too out of hand. Preventing major problems will save you thousands of dollars and stop crises from hurting your business.
Asset Panda understands that the financial side of your business can get extremely complicated. Trying to manage all of the aspects that affect your profits can quickly become overwhelming if you don’t have a system to manage them. We created our software platform to help you simplify everything related to your assets, so you can put your attention on the more complicated aspects of your company.