When a businessman says they aren’t familiar with the term Depreciation, we tell them that they’re bearing huge loss every year without even realizing.
After spending a few months in the business world, you easily understand that running a business isn’t like running a household. There are multiple elements that can lead you to huge losses if you didn’t manage them on time.
Depreciation is one of the most important elements that need your attention in the business world.
What is depreciation in accounting?
You must have purchased several assets for running your business. These assets continue losing their value until it becomes zero or negligible. The reduction in the value of these assets is known as depreciation in the business world. If you didn’t take it into consideration, it may reduce your profits to an extent.
Fixed assets like machinery, computers, office equipment, and buildings are affected by depreciation. However, if you’ve purchased an area of land for running your business, it won’t be included in the depreciation because the land’s value increases over time instead of going down.
How you can Calculate Depreciation?
Hopefully, you’ve understood the main concept of Depreciation by now. So, we should now take a look at how you can calculate the depreciation. Usually, there are three different methods used to calculate the depreciation.
When it comes to measuring the depreciation, you need to keep an eye on three important elements such as the Useful life of the asset, its salvage value, and its overall cost.
You can record the right profit on your balance sheet if you include depreciation in your accounting. We strongly recommend hiring an expert for measuring the depreciation because it’s not everyone’s cup of tea. There are several accounting tools you can use to measure the depreciation.
Importance of Depreciation
You get to understand the true cost of doing business when you take help from depreciation accounting. The businesses need to know the depreciation if they want to get a clear idea of the company’s profitability because you’d have to replace the assets if they lost their value.
Even if you didn’t consider this element in the past, you can use it to get an estimate of how much money you’ve lost during these years. The best part is that you can significantly reduce your taxes by mentioning the depreciation into your balance sheet.