What is Depreciation, and Why Should You Care?


When you start a business or purchase an asset, you have to keep track of the value of that expense. You will do this by tracking the monetary value and the useful life period of your assets. Depreciation is the charging of an expense based on the useful life of an asset when you purchase it. Depreciation is one of those accounting terms that can become quite complex. So, let’s break it down and examine why you need to care about depreciation as a small business owner why depreciation calculator at Capital Claims can be a great help. 

What is depreciation?

Depreciation is just one of those business expenses that you aren’t thrilled about. It feels like cash out the door, and it isn’t easy to get it back. As a business owner, don’t be afraid of depreciation because it’ll help your bottom line. Here’s what you need to know about this important tax deduction. _…_ depreciation is an expense many businesses claim on their annual returns as a tax deduction and can significantly lower your taxable income for that year. It reduces the value of certain capital assets over time. This is the process of allocating the cost of tangible assets over their useful life span.

Accumulated depreciation is deducted from the asset’s original cost and reported as an expense in the period in which it occurred. Depreciation expense is an accounting concept, one component of the broader financial statement called the Statement of Profit and Loss – or “P&L” report. As a tool for financial management, depreciation allows businesses to match their assets’ purchase price and related costs against their operational expenses and revenues.

Depreciation for businesses

Businesses depreciate certain assets in order to spread the cost of these assets over a number of years. Depreciation expense helps reduce income to a level that is competitive with other businesses.

Depreciation refers to decreasing the value of a property as time passes. It’s an expense that allows businesses to subtract a portion of the cost of the property from their annual taxable profit. Depreciation is almost always based on an object’s estimated “useful life.” The Internal Revenue Service (IRS) calls this “depreciable basis” and limits investments in depreciable lives to 30 years for buildings and improvements and five years for durable goods, such as machinery and tools.

It stands out in the ledgers as a tiny line item by comparison to the bigger expenses like salaries and rent. However, it’s one of those expenses that can eat into your business’s profits if you don’t take the time to use it correctly.

Taxes & depreciations 

The Australian Tax Office (ATO) has begun to express concern over the 12% depreciation on vehicles used for business. At present, businesses that use their vehicle for more than 50% of the time on operations can claim an immediate deduction for that cost and depreciation at 12%. The ATO is starting to question this deduction, and no doubt, many businesses will be concerned about changing their practices.

Overlooked, undervalued, and most commonly, depreciation has been an issue for small business owners and taxpayers for a long time. 

Depreciation is a tax deduction based on the use of a capital asset. It is a method of computing the amount of your expenses towards the decline in the market value of a tangible property held for productive use in business and used in your trade or business or held for investment. Depreciable property may or may not require periodic maintenance, repairs, and replacement.

Fixed asset & depreciation

Fixed assets are non-current assets such as land, buildings, permanent improvements, equipment, vehicles, and machinery that do not have a determinable useful life.  Most fixed assets lose their economic value and become worthless when used up or are no longer functional.  Depreciation is the allocation of the cost of an asset over its useful life and is recognized in the financial statements as an expense that reduces net income.

A combination of fixed assets will have a higher value than any of the single components themselves. Each component will need to be listed individually, and each is worth assigned a percentage share to arrive at an overall figure for a well-equipped company.

Depreciation and small business

Any small business owner who wants to use their assets to grow their business should understand the process of depreciation. While it can become complicated, you don’t need a master’s degree in accounting to at least understand the basics.

As the owner of a small business, you need to be aware of the effects of depreciation. You also need to know when and how to depreciate assets for your business. Depreciation for small businesses is an acceptable accounting practice that measures the amount of wear and tear an asset endures when it is used over time. This decreases the value of tangible assets over time and reduces taxable profits.

Final words

If you are a business owner and you’re doing business in the United States, you’ll probably need to use the depreciation financial statement. Depreciation is a method that many businesses use to account for their asset’s life cycle. It is used for treating the value of assets in order to generate taxes for small business owners. However, it is also used when reporting the figures of your company as well as when accounting for discrepancies that may occur in your company (such as an employee pretending that his or her truck is malfunctioning just to claim a new one). Depreciation is used in almost every industry, business, and even at home if a person owns any type of assets in their household.


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