Depreciation schedule might not be something you are familiar with, especially if you are not studying accounting or at least work in a company. The term is very popular and is, in fact, in use by a lot of accounting departments in any company. It is an accounting method that is used by accountants all over the world to count how much an asset will ‘depreciate’ in the future. ‘Depreciate’ here means decline or reduce, and the thing that can depreciate in an asset is its value. In short, businesses use this depreciation thingy to count how long the asset would be useful to a company.
This is a pretty nice method to reduce business taxes, but that does not mean a business can depreciate their assets to their heart’s content, no. There are several guidelines from their country’s tax agency that they need to follow when it comes to depreciating their assets.
Depreciation and how it is looked upon by accounting students
The general rule of depreciation has been mentioned in the intro, but you might be wondering how an accounting student handles depreciation. To make it simple, depreciation to an accounting student is as complex as it is to us. Even those who have studied accounting find it hard to count depreciation thanks to its complex nature. One of the reasons why depreciation is complex is the fact that there is no real cash flow going on here. Depreciation is a sort of assumption, a projected number that tells how long an asset can stay before its value declines.
An example of depreciation
If you think this is too complex to understand, then you should not worry. A whole lot of people in the world does not know it as well, so you can rest easy knowing that you are not the only one confused. To make things easier, we will provide a quick example for you to learn. Say for an example you got an asset that you pay $100.000 for. Now, you can either write the entirety of the cost in year one or you can write the value of the asset in the course of 12-year. Furthermore, say your company will scrap the asset for $50.000.
To find the amount of depreciation, you need to do a bit of math. First thing first, deduct the value of the asset with the scrap amount (in this case, it would be $100.000 – $50.000). When you have already got the result, divide it again with the number of years until you write the asset off (in this case 12). Putting it to formula, you will get ($100.000 – $50.000)/12. The answer to this is $4.200.
What does this mean? This means that your business will have to take $4.200 from its net income to be paid to the tax agency. This will reduce the amount of tax your business needs to pay and artificially increase your net income.
What are the things that can depreciate?
While depreciation is something that many people will be confused with, perhaps by looking at what are the things that can depreciate will help you. Below are the assets that can depreciate in the future:
-Machines: machines can deteriorate over time, so it is only natural for it to be able to depreciate. Robots, no matter how sentient they are, count as machines, too. If you got a robot working for your company, you need to put it in the list of items that can depreciate.
-Cars and trucks: cars and trucks start to depreciate each time you are using it. Some people also claim that they will depreciate the moment you purchased it from a dealer.
-Furniture, office equipment, and other things related to offices: because all of them are used to gain net income, it is only right for a tax agency to tax it.
-Patents and copyrights: patents and copyrights are something that can depreciate in value, too. Patents and copyrights, after all, will make you liable to gain income from using it. If there is something that makes you get money, you can be sure the tax agency will sniff around it and tax it.
-Office buildings: the same rule applies. As long as you can make money with something, that certain something is depreciable and will be taxed according to the regulation. This includes building.
On the other hand, what are the things that you cannot depreciate?
Anything that lasts for a year or less, more or less. If you have exhausted it before a year has passed, then you cannot depreciate that item. Things like cash and supplies are not depreciable. You cannot depreciate lands too because lands – if there is no business building sitting on it – will only increase in price. While the lands are not depreciable, the buildings are viable for depreciation.
Back to the main topic: what is a depreciation schedule?
A depreciation schedule is a schedule that contains several useful information when it comes to depreciation. Normally, a depreciation schedule will have information below:
-the name of the title and a brief description of it: useful for sorting purpose. The brief description is needed because each item got different depreciation timeline. Perhaps you got two items of the same kind but you paid different amount of money for them. The depreciation line will definitely be different for the two.
-the initial cost of the item: the base of future calculations.
-the lifetime estimate: this is the number that the tax agency will assign to an item. Can range from 3 to 39 years, depending on the item be depreciated.
-the salvage value: the value of the item when you sell it to other companies or individuals. This determines your net income.
-purchase date: for ease of record-keeping.
-the depreciation period: again, to help you with record keeping.
Those are the things that you will find in many depreciation templates. While each depreciation schedule template might contain different items, those items we mentioned above are the most important items to have in a template.