What is Depreciation?

Perhaps the word depreciation is often used without really being aware of it.  Sometimes we may not know that we are already dealing with it because we deal with it sans the term.  It is something that is simply a part of our assets’ life and whether we talk about it or not, all assets’ value decreases or is lessened as time goes by.

Depreciation in Business

This term is most often discussed and dealt with in business because it is involved in making a financial report.  It is also used for tax purposes, but what is it really all about?  What does it really mean?

Depreciation happens when the value of a certain asset is decreased. It is important to know about the decreased value of an asset because it directly affects the balance sheet in a business.  Another definition for it is the portioning of the cost of the asset across a certain period in which that certain asset is still useful.  This then affects the net income of the business.  Given the definitions of what it is, we then can conclude that it is an essential component of business that we cannot take granted. And that it why, at the start of a business, there must be a valuation of all the assets so that in the long run, you will not have a hard time backtracking or keeping track of all your assets as well as their current value.

How to Track Depreciation

depreciationTo make the valuation of your assets easier, you can use a depreciation table so that you will have a guide on how to compute for the value of your assets after a certain period of time.  As mentioned, it is important that you do this because it will have a great effect on your tax as well as the net income of your business. Failure to do so could result in a mis-declaration on both your tax and assets sheet, and this could result to more problems in the end.

Computing for this may come in different ways because it depends on several factors such as the type of asset, and also it may depend on the law or accounting standards. The depreciation of an asset starts as soon as it is used. So for example, a brand new car this week would already have depreciated a week after even if it were only used for short drives.

Some companies hire a specialized company to do this for them, and it is also true in some countries like Australia where the depreciation Perth can be done by some companies to do the reports on tax depreciation especially for properties and buildings.

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