Capturing Depreciation is SO Important (And It Saves You Money)
Some Accounting entries are not directly related to a transaction. Depreciation is one of these entries.
Investopedia defines depreciation as:
“The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an asset's value has been used”
How Can Depreciation Save You Money?
Capturing depreciation can save you money because it is an expense that lowers your taxable income.
For example:
Let’s say your business bought a filing cabinet for $5,600 (wow)
Let’s use the depreciation calculator to determine the depreciation expense for each year:
Note: The depreciation calculator lets you depreciate assets using different methods. Although each method ultimately gets you the same amount of depreciation expense over the life of the asset. It may be beneficial to use a method that lets you capture more depreciation expense sooner because, over time the value of money decreases. $100 saved today, is better than $100 saved in a year. I’m sure we all have felt this in action with the inflation we have been experiencing.
Method: (for this example we will use straight line, this is the simplest method)
Asset Cost (In this case, what we bought it for): $5,600
Salvage Value (How much we can sell it after it was been fully depreciated): $250 (Let’s assume we checked marketplaces and that’s the price of heavily used cabinets)
Depreciation Years: 7 Years (See how many years you can depreciate here)
Round to Dollars: Yes
Partial year depreciation: Yes (Let’s assume we started using the cabinet on July 1st), Count Every day, and start the accounting year on Jan 1st.
The calculator will tell us that for the first year, our depreciation expense for 2023 will be $385.
The depreciation expense for 2024-2029 will be $764 per year.
The depreciation expense for 2030 will be $381 (this is the other half of the year that we did not use in 2023.)
Over the lifetime of the asset, the depreciation expense will be $5,350. This means that you can lower your taxable income by over $5,000 over 7 years if you record your depreciation expense. It is a simple calculation that will save you A LOT of money in taxes!
