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The Importance of Depreciation and Asset Management

In a previous post, we discussed the importance of maintaining good accounting and bookkeeping practices. One aspect of proper bookkeeping includes tracking depreciation and asset management.

If your company is new to the U.S. market, it is essential to know that GAAP (Generally Accepted Accounting Principles) stipulates that “companies are not permitted to expense the cost of a long-term asset when they purchase the asset. Rather, they must depreciate or spread the cost over the asset’s useful life.”

What is depreciation? 

According to the Internal Revenue Service (IRS) website, “[d]epreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.”

Items to be depreciated are fixed assets, which appear on your balance sheet and contribute to the overall worth of your company. Intangible items, such as patents and trademarks, also depreciate over time. They, however, are amortized, which is to have the initial cost of an asset gradually written off over a period.

Depreciation is a process of allocation, and not valuation, according to Accounting Standards Codification (ASC). Since items intrinsically lose value, it is unreasonable to expect that a large item (like a vehicle or a building) is going to maintain its value from one year to the next. (Land is an exception, and it does not depreciate. Inventory is also not included, since it rotates.)

Ultimately, depreciation is used to recover the cost of your company’s fixed assets through the act of expensing a portion of the initial cost year after year. It allows your company to financially benefit from the value of the item over the course of its useful life.

You, along with your CPA (Certified Public Accountant), should decide which depreciation schedule is right for you and your various assets. But some general industry guidelines with regard to useful life estimates include the following:

  • Computers – 5 years
  • Vehicles – 5 years
  • Science and Engineering equipment – 10 years
  • Audio/Visual equipment – 10 years
  • Fencing – 20 years

Depreciation schedules vary from country to country, so you should not rely on the schedule with which you are familiar from the home country of your parent company.

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