Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
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Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy!
Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up! You can submit your questions directly to Hello@kashthebookkeeper.com! You may hear your question aired live across the globe! Last week, we discussed the first tough lesson of entrepreneurs- the cash reconciliation.
This week’s main question is: What is “depreciation”? We covered the concept last season, but there is so much more to depreciation than meets the eye. In short: Depreciation is the reduction in value of an asset with the passage of time, due to wear and tear/use of the asset.
Show Objectives - The Why
Have you ever purchased a new car or know anyone who has? Personal finance gurus advise buying a late model used car over a new car due to first-year depreciation.
According to carsdirect.com A new car depreciates or loses value almost immediately after you drive it off a dealer's lot. As a quick rule of thumb, a car will lose between 15% and 20% of its value each year according to Bankrate.com. This phenomenon is not limited to cars, but applies to every business asset other than cash.
Depreciation allows an asset to be expensed in pieces every year. The net amount ( cost - depreciation) is known as the “book value” of the asset. The amount of cash the asset can be exchanged for is known as the “market value”. The difference between the book and market values will determine the gain or loss on that asset. As a business owner, we need to understand what the market value of our assets are, in case we need to sell them to cover our expenses or liabilities. This becomes pivotal when we are looking for funding or investors. Keeping detailed notes on depreciation is important not just for federal tax purposes, but personal property taxes as well.
What You Need to Know - The What
Depreciation can get complicated when you start involving numbers, so it is easier to focus on the big picture instead of getting bogged down in the technicalities.
Here is the big picture: The result of all those complex depreciation calculations is that the government will pay for a portion of the cost of the assets you acquire to use in your business. That payment comes to you through a reduction in the taxes you pay over one or more years after you purchase the assets.
There are three methods commonly used to calculate depreciation.
Three main inputs are required to calculate depreciation:
Depreciation allows a portion of the cost of a fixed asset to be expensed in the year of purchase and every year for a set period of time. The period of time and the allowable annual portion of depreciation depends on the method of depreciation used. BUT WAIT.. there’s more! Depending on the type of asset, the location of the asset, and the year in which it was purchased, it could be a candidate for SPECIAL DEPRECIATION! *duunn dun dunnnnnnnnnn!*
Fortunately, the IRS publishes tables that simplify the depreciation calculations. And most accounting software for your business comes with a depreciation program included or available as an add-on.
What You Need to Do - The How
Let’s stripe down the mechanics of depreciation into simple steps. After purchasing something for your business:
If you want more detailed information on the actual calculation of depreciation check out these helpful guides:
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Next: How do I build business credit?
Written by Kash the bookkeeper
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