4 Advantages Of Depreciation
What Are The Advantages Of Depreciation?
There are plenty of advantages to depreciation. But we’ll narrow it down to the big four fine points only to keep things easier.
1. Matching Expenses
Depreciation expense helps a company state the amount of expense incurred (from using an asset) to properly match with the revenue generated in the same period. Most businesses, particularly machinery, farming, agriculture, etc., will have to buy an equipment one way or another, and keep recording and calculating their expenses on the books. This way, you don't just keep track of your assets but can also see exactly how much revenue you are generating.
2. Asset Valuation
The value of an asset tends to decrease over a period of time due to various factors. So in order to present a true state of affairs of the business, the assets need to be shown on the balance sheet. This provides a way for recovering the purchase cost of the asset. An asset’s net book value is the original purchase cost subtracted from the asset’s accumulated depreciation. Reporting the value of the asset with the depreciation helps a lot when analysing, knowing that the value of the depreciation is more correct.
3. Replacement Cost
Depreciation applies to all sorts of assets, more than you may realize. It provides a way for recovering the purchase cost of the asset where your company can recover the total asset cost over its useful life. Furthermore, it becomes easier to ascertain if these assets are in need of replacement or not. Thus, depreciation helps companies to set aside part of the revenue as funds for replacement of the worn out asset.
4. Tax Benefits
Depreciation helps you receive tax benefits associated with recording the expense. If depreciation is not charged on an asset, your profit and loss account will show more profits, thereby paying more taxes. But depreciation charges on assets will save you the amount of tax charged, equivalent to its tax rate since it is shown as an expense in your profit and loss account, thereby reducing the amount of the profit, and eventually the tax rate.
So, is depreciation worth the trouble?
There is no doubt that it will be time-consuming, especially for startups who are yet to determine whether the system or the method works for them. But in the long haul of it all, the benefits of depreciation deduction, especially when your business benefits your financial statements the most, calculated with the tax rates you will be paying, are totally worth the effort. The trick is to have first-rate Chartered Accountants who know what they are doing, and will be with you all the way through! And that is exactly what we do.