All About Depreciation
Every businessman is aware of this term, we hope!! Well, in case you are a newbie to the business arena, then you might not know!! But, this is the most important topic just like cash flow, to be known to every businessman.
The experienced would have learned the hard way, but you the young folks, can learn from here, all about it and be prepared to face any economic change that comes your way! Change is always constant and trying to embrace will open up new venues!!
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Well, let’s start the whole topic by understanding the terminology:
What is depreciation?
In economics, the word depreciation means to gradually decrease the value of the stock or firm or any other entity that might physically depreciate the value.
Well, now according to Accounting terminology, the word depreciation means that there is a reduced cost of the fixed asset in a systemic manner until the value reaches zero!
Businesses follow this depreciation process to reduce the expense levied on them to maintain these fixed assets which decrease in value over time, like the machinery, furniture’s, buildings and other office equipment’s.
When the asset in use, their associated expenses will be added to the revenue sheet, which helps in analyzing the complete picture of the company revenue generation.
Well, this might sound like depreciation can be applicable only to larger businesses, as they have huge machinery and lots of assets that are fixed. But, that’s not right, even the small businesses have their own level of a fixed asset, even a single computer machine that has been for 5 years, will attract a depreciation in value.
So, what do you need, in order to calculate?
Life of the asset:
The time period until which the business tends to use the asset. The productive time period of the asset mentioned. Beyond this lifespan, the asset will no more be used to your business and is no more cost-effective.
Cost of the fixed asset:
This will add the cost of the asset along with any of its shipping charge, any taxes paid and preparation or set up expenses incurred.
The salvage value of the Fixed asset:
This refers to the value of the fixed asset, that the company has set to the expired asset, which has finished its lifespan.