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The Importance of Depreciating Fixed Assets


The Importance of Depreciating Fixed Assets

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Finally, you've mastered asset management. Your employees are all on the same page and know how to update your database, the software is configured to suit your needs, and things are running smoothly.

However, there is one thing that you may have overlooked that will result in thousands of dollars in tax savings for your company. It is imperative that you don't overlook the value of depreciation for assets.

Fixed Asset Depreciation

Depreciation of fixed assets allows businesses to deduct the cost of assets over time. This technique can be used for both tax and accounting purposes, and can apply to buildings, vehicles, equipment, furniture, machines, and software.

The purpose of this process isn't to generate revenue. Rather, it is to allow a company to review an asset's use over time and use that information to report actual asset expenses, not just the cost of purchase.

The Benefits of Depreciation

Here are some of the benefits of depreciating your fixed assets:

  • Businesses need it to report the correct net book value of an asset. Normally, businesses report the asset's original purchase price. However, assets undergo daily wear and tear over time, reducing their actual value. The net book value of an asset can be determined by subtracting the asset's overall depreciation expense from its cost when it was purchased.
  • By depreciating assets, companies can accurately state the expenses incurred from using those assets and compare that with revenue those assets generate. The absence of depreciation can lead to overstatement or understatement of total asset expenses, which can lead to misleading financial reports.
  • When a company uses depreciation to recover an asset's initial cost, it will be able to do so over its lifespan instead of recovering the entire purchase price immediately.

When you buy some equipment for $50,000, you have two options: either write off the cost of the asset that year or deduct the value of the asset over an expected 10 year life cycle.

If you expect a minimum value of $6,000, you can expect a cost of $4,400 per year in depreciation.

Some items should not be depreciated in asset management systems. Items that aren't expensive or won't last for more than a few months are not included in this process. Land and personal items used outside of business are not included in this process.

In contrast, items such as cars and computers that are both used for personal and business purposes can be partially depreciated.

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We've built BlueTally to help all kinds of companies and organizations manage the depreciation of their most important assets - both physical and digital. Learn more about BlueTally and get started for free with our simple and free asset management software.

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