If four people were asked for depreciation, then I would probably have four different answers:
- Deliberation of assets,
- Exchange of assets,
- Accounting tool for tax cuts or
- ] All four would be bad. Accountants are not well acquainted with the explanation of things – which can take into account the above misconceptions – but I will try to explain:
- You will understand something more about your account,
- others with your accounting knowledge
- You will understand that what is depreciation on your accounts and budgets, but not in cash flow statements
- You can better understand and prepare budgets and
- make better decisions about businesses that can be purchased or invested.
The amortization explanation begins with cost and tools:
What you spend in business is what we call a burden:
- You pay your telephone bill to get your phone bill.
- You pay for a new car that you own a vehicle by car.
We pay for both of us, but accountants treat them differently. The reason is the time
- Any expense that is worn out within a year is a cost – the phone bill is worn out and now there is nothing to show. It's a cost.
- Any release that has not been used during one year (the car is over for a year, hopefully). At the end of the year there is still a car that will show her.
Expenditures get into the result and thus reduce the tax. The profit and loss account shows your income and expenses.
Tools are going to the balance sheet * and have no effect on the profits. The balance will show you what you need and own at any time.
Now, what happens to the devices?
So buy your car and cost you the balance, buildings, equipment, equipment and other tools. In the balance, you show what assets are in your possession … but not how worthy. These tools will remain on the balance until the accountant does something with them … and what he does, evaluates them.
As you know, every device, except the earth, wears out and eventually ends. So let your scales at the original expense leave the land until you sell it. We do not cut the ground.
All the other devices are worn out or somehow consumed somewhat – a bit like a phone bill, but in a much longer time. Of course, if you buy a car, a bulldozer, a trawler or a computer, we do not know how long you will keep them. The best way to start is to figure out how long it will be productive for you. The attitudes of auditors is that educated guesswork is better than nothing at all.
We may think that a building lasts for 50 years, so we spend 2% of its costs each year from the balance sheet to the report. After 50 years we have overrun all our costs and our balance will be $ 0.00.
We could think that office furniture lasts 10 years, so 10% of our cost is transferred annually to the balance sheet income statement. After ten years, all costs have been transferred and we have a $ 0.00 balance.
Depreciation is a cost of a device that is distributed over its useful life. The amount transferred from our balance sheet to our income tax is called the so-called depreciation annually
So now you can quote the accounting definition of depreciation, right? This is a cost of a device during its useful life. That's what you say, and people think you're an accountant.
With the numbers I make it easier:
will buy her for $ 30,000. We estimate it lasts for 5 years and is estimated at $ 6,000 per year – a fifth annually
After the first year, the book value is $ 24,000 ($ 30,000 – $ 6,000 depreciation)
After the second year the book value is $ 18,000 (last year's book value of $ 24,000 – $ 6,000 depreciation)
Every year, $ 6,000 will be released from your balance sheet and your income statement and this will cost you $ 6,000 to cut your profit . ]
The above explains why there might be huge profits and declining bank accounts … or huge losses and rising bank accounts … or both profits and profits bank balances up or both are depleted
There is no connection between the gain and the bank balance (or cash flow) – depreciation is one of the reasons for it. Depreciation is simply an accounting item – this is just a transfer between accounting statements
Thus, in the first year, your bank account dropped by car ($ 30,000) and its profit fell only at depreciation cost of $ 6,000  had no impact on his bank account, but he still took $ 6,000 (depreciation) from his profits. The same is true for the next three years.
The same is true when preparing your budgets – depreciation expense is in the budget of the profit margin but not in the cash flow budgets.
Taking Entrepreneurs and Smart Investment Decisions
The above may seem like a lot of intellectual quine output that is not related to real life … to somebody's real life, really!
(or somewhere else) finds that the book shows the values that the assets are in the balance sheet, it does not matter to the value of these assets. The book values are simply the mathematical balance, what remained after deducting depreciation. And since depreciation is most advantageous, the related things should not be based on asset values.
However, if you want to invest in a business, do not rely on the book value of assets for anything. The book values are nothing to you. If you do not know what to expect, do not look at your accounts, but make a valuator to evaluate the tools for you.
What I missed
Depreciation was a big deal and my goal was to explain my main job. I would not be irresponsible if I did not warn you that there are things I have not explained yet:
- Why do not we evaluate most devices in the same amount (eg $ 6,000) per year
- What do you do (or your accountant) when you sell the depreciated asset and
- The Tax Office has a number of depreciation rules.
If you have further questions about the depreciation, call me.
* Every so often, accountants come out with different names for the same old things. I never dare to suggest confusing people, but I noticed that every new name for a time is getting bigger and bigger every time.
What is called a Revenue is now called Financial Performance Statement . What is called a balance is now called Financial Position Statement . Anyway, I think you are happy to employ someone!
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