What You Need to Know About Equipment Depreciation
Your equipment – everything from computers to copiers, furniture to vehicles – is considered an asset to your business. Rightfully so, since most equipment is a pretty significant investment most of the time. From the vital equipment that keeps your business running to the fixtures and furniture that keep your employees working safely, it all matters – but it all also has a life span for accounting purposes. The longer you own a fixed asset the less it’s worth: the value decreases in a process called depreciation. Equipment depreciation is of note when it comes to taxes and general accounting.
Straight Line Depreciation Accounting
Straight line depreciation is one of the most common ways of figuring out how much equipment depreciation is costing you. It’s also the simplest accounting method. As the value of your assets decreases, its value needs to be noted in your accounting.
To use the straight line depreciation method of accounting for your assets, simply start with the initial purchase price of the item, and estimate its depreciation annually with an equal percentage amount based on how long that equipment is expected to last. For example, the first year you own a computer, it may be worth its $2,000 purchase price. But if you expect to replace it in 5 years, it’ll depreciate 20 percent each year, so the second year you own it it will only be worth $1600 and so on.
Declining Balance Accounting
To use the declining balance method of depreciation accounting, you’d assume a larger amount of equipment depreciation the first year of the equipment’s usage and less each year after that. While more complex, this is useful for things that see a lot of wear and tear in their first year of use – such as vehicles – and are slowly phased out in favor of other, better performing options. So you may see, for example, a depreciation of 40% that first year and 20% the next year and 10% the year after that.
Useful Life Estimation
The figures used for figuring out the useful life of a fixed asset are determined by the IRS. No matter how you calculate your equipment depreciation, it’s a good idea to consult with your accountant to find out the depreciation recovery period for both accounting and tax purposes. Even if you plan to use and keep your equipment for longer than the suggested lifespan of the asset, you still can only claim so much value of it – even if it’s invaluable to you.