Summary:
This article describes the different types of depreciation and informs us of the possible risk of buying fixed assets. With the understanding of depreciation, people and businesses can save a lot of money by paying less income tax. This can greatly influence a businesses net worth and the amount of profit it is making. The most common and easy method of depreciation is the straight-line depreciation method. In a straight-line depreciation method, assets depreciate equally and therefore depreciate at the same amount during its whole life span. When an asset produces a lot of revenue during its early life, this is known as an accelerated depreciation method. In this type of depreciation, the asset is earning a lot of revenue while having a huge tax deduction.
Connections:
Depreciation is one of the accounts in a balance sheet which all accountants must know about in order to be successful. Not only accountants, but students who study accounting should know what depreciation is. By knowing the depreciation methods, accountants can advise and suggest the owners about which method is best suited for the business. Many small businesses don’t make a lot of revenue, so they have to reduce the amount of expenses in order to make a profit. Every business can increase their profits with the knowledge of depreciation by paying less tax.
Reflection:
Depreciation may be eating away your money without you even knowing. Due to the lack of knowledge, businesses seem to lose or not earn as much money as they could have. With the knowledge of depreciation, people are able to save lots of money from paying less tax. Furthermore people are more informed about the amount of time that an asset has left until it loses its usefulness. This enables people to use the asset to its fullest before it becomes worthless. Therefore I believe that it is important and helpful for every business to know about this information.
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