Organizations equipped with a lot of assets and each asset is important in running daily business. These assets must be accounted for the objective of depreciation management. For depreciation management, depreciation tracking is mandatory! As it can be helpful in saving costs for the company.
When an organization has a plethora of assets then keeping track of depreciation manually is not a simple job. This is why depreciation tracking software is required for proper and accurate depreciation tracking. Besides this software provide several other benefits as well.
Depreciation is important for knowing the value of asset efficiency and it also helps in knowing how much asset life is left! When you properly keep track of depreciation you will also know when an asset needs to be disposed of. Thus, depreciation helps in making a financial decision as well. Accurate depreciation tracking helps in making precise tax reports and it also ensures compliance.
What is asset depreciation?
Every organization has assets that help in depreciation. It helps in finding the actual worth value of an organization. When assets are used continuously for a long time their value decreases. Thus, it is important to evaluate your assets from time to time. With depreciation calculation, you can distribute the purchase cost of an asset to its whole expected life. In simple words, assets will be depreciated every year with the same amount.
According to Investopedia
“Asset depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits.”
What are the methods for depreciation tracking?
There are many methods available for depreciation tracking such as the straight-line method, double declining balance method, units of production method, the sum of years digits method. However, in asset management software you will mainly find down value methods & straight-line methods (most used method for calculation of depreciation).
Explain the most used depreciation calculation methods with an example?
Suppose an organization purchases a piece of equipment of 20,000 dollars and declares its salvage value 4,000 dollars. Moreover, it has a useful life of 5 years.
Now, (20000-4000) / 5 that is equal to 3200 of depreciation expense per year. It means that the company does not have to show a complete expenses in one year. An organization can divide the expense over the useful asset life. The company has to expense 3200 against net income for this year and the next 4 years. When an asset useful life will be finished the organization will sell it for 4000 dollars. This method was a straight-line method.
The second method is the declining method is similar to the straight-line method but in percentage-wise. Here is an example suppose a machine is purchased for 10,000 has a salvage value of 2000 dollars and 5 years of useful life. So, each year it depreciates by 20 percent every year.
For the first year, the expense would be 20 percent of 8000, which is 1600 dollars.
For the second year, the expense would be 20 percent (8000-1600), which is 1280 dollars. This process goes the same way for the next 3 more years.
The third method is the sum of the year’s digits (SYD); in this method, you need to add all the life expected. For example, if the expected life is 5 years then you need to add like this 5+4+3+2+1= 15. This year, depreciation will be done as 5/15. In the next year, depreciation will be calculated as 4/15. This will be 3/15 in the next year and this process will be utilized until 1/15 is not calculated. This method enables to use of accelerated depreciation.
Why depreciation tracking is important?
As depreciation is an important part of business, it plays a crucial role in tax saving, asset evaluation, making a financial decision, understanding the asset life cycle, maintaining legal compliance. However, accuracy is also important for depreciation tracking in fact without accuracy depreciation tracking will be null and void.
Therefore, manual depreciation tracking is not a good practice at all. Only proper asset management software shall be used for the purpose of depreciation tracking.
How asset tracking software assist business?
As the software removes the ‘manual’ factor & automated process is followed. When you enter assets, details include purchase-related documents, depreciation percent. This software has a deprecation calculator based on the straight-line method. It provides reports and alerts you about asset expiry and so on!
There is no doubt that depreciation is one of the most effective techniques for saving money. However, depreciation tracking should be done accurately otherwise this move can backfire.
We know depreciation is an important activity of audit and checking regulatory compliance. When your organization is equipped with the asset management software you will not have to worry about compliance or audit. Furthermore, you can easily track depreciation.