Your company’s fixed assets are one of its most important resources. They help your company generate revenue and can prove valuable when it comes time for your company to pay its taxes.
How are you keeping track of them? If you aren’t already, it’s time to start thinking about it.
After purchasing a new fixed asset, your company has two options. Your accounting team can either write off the entire purchase cost of the asset that year or write it off over is expected lifetime value. It may sound easier to simply write off the purchase during the year of purchase. After all, it will all add up to the purchase cost in the long run.
But in reality, being able to track an asset’s depreciation can provide a long term benefit to your business. First, let’s define some terms.
Fixed Asset Depreciation
When calculating the depreciation of a fixed asset, there are three inputs you need to keep in mind: useful life, salvage value and the cost of the asset.
The useful life of an asset is exactly as it sounds. It’s the period over which the company considers a fixed asset productive. Once this period ends, the asset no longer serves a purpose and can be replaced.
The salvage value and cost of the asset are fairly straightforward, as well. The salvage value is the amount for which your company can sell the asset once its useful life has ended. The cost of the asset is the amount you pay for it at the outset.
Now that we understand the basics, it’s time to talk more about the methods of depreciation. The first is the straight line method, which evenly divides overall depreciation over the useful life of the asset. In contrast, the accelerated depreciation method entails more depreciation in the first few years of an assets life and less as it goes on.
While the straight line method is clearly simpler to calculate, the accelerated method can yield quite a few positive benefits if used correctly.
Here are a few reasons why it’s crucial to have a viable system for tracking your company’s fixed assets.
1. It Will Help You Avoid an Audit
No company wants to deal with the IRS. Audits can cost your company time and money. You can avoid the hassle simply by tracking your fixed assets methodically.
You might be wondering why the IRS would care about a slight miscalculation in the value of the building your company owns, or the machinery it uses to create products. In fact, failing to accurately record the depreciation over an asset’s useful life can lead to overvaluing it in your books.
Failing to track an asset’s depreciation can also lead to misleading cash flow statements. If you remember from your intro to accounting courses, cash flow statements contain cash flow from operating, investing and financing activities. Investing activities include cash spent on equipment. Make sure your accounting team has a system for efficiently gathering this information in advance of your company’s tax deadline.
2. It Will Give You Flexibility
We mentioned before you can, in some cases, immediately write off the asset’s purchase. Sometimes, however, this isn’t the right course of action.
For instance, if you’re projecting an upcoming strong quarter or year, it probably makes sense to write off the purchase over its useful life since there’s a chance your company will move into a higher tax bracket and could therefore benefit from additional tax relief.
When deciding which method to pursue, be sure to first consult with your accounting team. They should be able to offer you in depth information into your company’s current and future expected cash flow. If your projections indicate future growth, you should probably consider writing off the asset as it depreciates and use the money saved in taxes to invest in other assets.
3. It Will Help You Make Better Financial Decisions
The importance of having a decision-making process rooted in data is a common refrain in all business literature. This goes for asset planning, as well.
Simply put, if you don’t have a consistent and accurate method for tracking the depreciation of a fixed asset, there’s a high likelihood you’re either over or under reporting them. Inaccurate financial information can make it difficult for you and your fellow managers to make informed decisions regarding financing and investment.
No company can afford to make decisions in the dark. Thankfully, there’s help. Timac Business Systems is a licensed dealer of the Sage 100 Fixed Asset – Depreciation add on. Schedule a time to meet with one of our product experts who can show you how the software can give you the control you need over your company’s most valuable resources.