Want to optimize asset procurement, lifecycle, and retirement? Then you need to pay attention to a key element – fixed asset depreciation.
By setting up a consistent depreciation schedule, companies can keep track of the current value of capital owned. As assets lose value over time, depreciation management enables you to maintain accurate financial records. Why is this important? Correct asset valuation helps you file for taxes in time without bearing extra costs.
The best way to set up depreciation management is to automate asset tracking for your organization. Based in the cloud, a tracking software stores all your information online so you don’t miss out on your depreciation schedule.
Once you select a suitable tracking software, you can design your depreciation management strategy in a few simple steps:
1. Label and document all assets
The first step is to document all the different types of assets your business possesses. A tracking software enables you to upload asset details in real time by creating barcode labels for each item. By using these labels you can enter the relevant asset information. Details such as purchase dates ensure that depreciation is measured accurately.
2. Determine which assets to depreciate
According to the Internal Revenue Service (IRS), not all fixed assets are eligible for depreciation. In order to qualify for depreciation, an asset must fulfil the following criteria:
- You must be the owner of the asset.
- The asset must be utilized in business or income producing activities.
- It must have a useful life of a year.
Physical assets such as vehicles and machinery become obsolete over time and need to be replaced. Likewise business properties like office buildings and rented property also lose value over time. This is why it is important to track depreciation and record the loss in value throughout the years. The correct depreciation measures also give accurate salvage values in case of sale of assets.
However, be careful not to add each and every item in the depreciation ledgers as it becomes too complex to follow through, especially for assets with short lifespans.
3. Create depreciation groups
Once you have all the assets listed down, the next step is to refine data in order to run depreciation. A tracking software enables you to filter data in the form of groups for streamlined asset depreciation. Depending on the organizational workflow, you can create groups based on different criteria like office locations or even departments.
For example, say you want to start a depreciation schedule for a New York office. Begin by creating a group Heavy Machinery-New York Office and add all the relevant items. By using an asset tracking system you can then automatically apply a depreciation method to all assets in the group. You can even create smaller groups for the Administration, Finance and Marketing departments. Having items in groups makes it easier to run asset depreciation by automating the whole process.
4. Select the appropriate depreciation method
In order to set up a depreciation schedule, it is important to choose the right asset depreciation measure. There are two main types of depreciation methods deployed by the majority of organizations:
- Straight line depreciation measure: The most common type of depreciation measure, the straight line method reduces the life of assets by a fixed amount every year. This measure is considered most appropriate if you want to depreciate buildings or property. Any asset that is expected to provide the same level of efficiency throughout its life can be depreciated with the straight line method.
- Declining balance method: The declining balance method distributes asset depreciation unevenly throughout the life of an item. Given this assumption the declining balance method is useful for heavy machinery or equipment that are expected to perform their best over the first few years. Prolonged usage and maintenance over time makes equipment obsolete and this should be reflected in your depreciation measure.
An asset tracking software enables you to choose from either a straight line or declining balance depreciation method depending on the nature of your assets. Selecting the appropriate depreciation schedule improves asset utilization and equipment efficiency overall.
5. Run depreciation audits
Depreciation expenses are one of the most critical expenses that report the business income. For this reason, it is crucial to ensure that they are correct. Even if you have automated the whole process, a good practice is to carry out depreciation audits regularly.
A tracking software keeps a record of real time depreciation measures that can be reviewed anytime. Simply assess the depreciation rates in order to check whether they have been applied correctly to the right assets. This is a good way to spot any miscalculations before you prepare your final income statements or file for taxes.
6. Create actionable reports with graphs
Timely asset depreciation enables organizations to run seamless business functions. As soon as an asset is nearing its end life, a purchase receipt can be generated for replacement. Sometimes, asset replacement requires different phases of approval before a new procurement order can be issued. This is true for heavy machinery or equipment that is expensive and requires funds to be generated well before time. Such situations call for detailed analysis throughout the financial year.
An asset tracking software enables organizations to prepare depreciation reports and graphs whenever needed. A visual representation of asset life gives a clear picture of how long equipment is going to last. These reports can also be used to file cases for replacement whenever needed. Detailed report insights enable businesses to forecast future expenses in time.
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EZOfficeInventory is a leading asset tracking software. It allows you to track, maintain, and report on inventory from anywhere, at any time. We offer a free 15-day trial – no credit card required!