Entrepreneurship is an exciting prospect. But it can also be frightening – especially when you are launching your first entrepreneurial venture. Larger purchases are investments – they might not show how valuable they are now, but down the road, you’ll be glad that you took your chances on them. Depreciation helps take the sting out of those hefty costs, which can also leave your recordkeeping in shambles.
Depreciation vs. Expense
Depreciation, as a concept, is more complicated than the typical expense report. How long will the asset last? Can you make it last longer than expected? Office furniture, production equipment, computers, and other similar items can all be depreciated.
Then consider the actual price tag of the asset in question – larger items tend to be costlier. The IRS mandates that you depreciate anything valued above $2,500. Thus, if your assets don’t meet that threshold, you can expense them and move on.
This method is a calculation that allows you to predict when the asset will no longer be useful. At that point, you’ll probably ready to replace the purchase or sell it. The depreciation tracks the pace at which you “pay off” or extract every last dollar of value from the asset in question.
Fixed Assets and Resale
The salvage value tells you how much money you can expect after a resale transaction. To find out what the salvage value is, depreciate the cost of the equipment. This approach isn’t as simple as it sounds because you’ll need to subtract the calculation’s expected resale value. Why does this matter so much? No matter the outcome, you must balance your books.
Depreciation of your fixed assets essentially means that the costs they incur are divided amongst several accounting periods. In this case, it can be for the years that it will yield dividends for you. The depreciated asset needs to be large enough that you’ll be using it for multiple accounting periods and will affect your bookkeeping the entire time. While you can perform depreciation in several ways, simply divide the cost by how many years you want to use it for; the figure that remains should be what you record as an expense every year going forward.
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