3 Areas In Which Depreciation Is Vital To Your Business
Posted on: 28 February 2022
Are you properly recording depreciation in your small business's bookkeeping? Depreciation is a valuable tool for maintaining accurate financial statements and minimizing your tax bill. If you're not sure that you're taking full advantage of it, here's what you need to know about why it matters in three key areas.
1. Income Taxes
Depreciation is a business expense. As such, it reduces your taxable income and therefore your taxes. As a deductible business expense, annual depreciation is deducted from gross earnings before taxes are calculated. You may even be able to choose the most advantageous method to calculate depreciation — such as straight line or accelerated depreciation — to manage your tax bill over time.
2. Profit Margin
Every company is in business to make money, but are you sure you're actually turning a profit? And if you are, is it really the profit you think it is? The only way to answer these questions is to keep the most accurate records of not only income but also the expenses of doing business.
Depreciation is often overlooked as a business expense because it's intangible — a bookkeeping transaction rather than a cash expense. But it is a legitimate cost of operation. After all, you pay more to keep up old equipment, and you get less money for it if you sell it in exchange for new equipment. Costs like these cut into your profit either now or later.
3. Financial Statements
Both you and your commercial associates rely on your financial statements to be accurate and trustworthy. This is one area in which your business reputation is won or lost.
If, for instance, your balance sheet shows that the company has $50,000 in assets and $40,000 in liabilities, it's currently in a profitable condition. But what if the value of those assets isn't accurate because they haven't been revalued to reflect what they're really worth today? The company might still be profitable, but it might also be in the red. Depreciation adjusts the value of assets every period so your books reflect real values.
If you aren't making full use of depreciation in any of these important areas, start by meeting with a bookkeeping service or accountant in your state. They will help you develop a system for recording depreciation, understand when to apply it, and use it to make better business decisions. Make an appointment with a bookkeeping service to learn more.
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