Organizations must account for the valuable equipment that they have for the purpose of accurate bookkeeping, smoother workflows and significant cost savings. However, fixed asset tracking can be a challenging task. Tracking assets on multiple fronts including location, ownership, maintenance and depreciation requires an organized and extensive method. This process becomes simple and effective with fixed asset tracking software that does all the work for you. For such software solutions, having a way to track depreciation has become a staple.
Depreciation tracking is crucial to fixed asset management as it helps organizations determine the value of their assets efficiently. This in turn helps organizations make well-informed financial decisions like purchase and disposal of assets. Calculating asset depreciation is also necessary when it comes to error-free tax reporting and ensuring legal compliance.
What is Asset Depreciation?
Every organization has fixed assets that accounting teams must take into consideration when determining the value of the organization. Such assets include property and equipment that is intended to be owned by a company for long periods of time. The value of these items may decrease due to wear and tear and the passage of time. Therefore, it is important for organizations to constantly revalue their assets. This is where depreciation tracking comes into play.
With depreciation calculations, organizations are able to spread the cost of equipment over its lifetime. What this means is that organizations do not need to deduct the entire purchase cost of an asset from their net income in the same accounting year that it is bought. There are many ways in which organizations can calculate depreciation on their assets. One of the most common and simplest method for this is the straight-line depreciation. This method evenly divides the cost of an asset over its expected useful life. For example, the annual depreciation for a piece of equipment with a cost of $2000, an expected lifetime of 10 years and a salvage value of $100 would be $190 (($2000-$100)/10). Other methods for depreciation calculation include the declining balance depreciation and sum-of-the-years’ digits depreciation. The choice of depreciation calculation depends on the legal requirements and type of equipment.
Below, we’ve listed a few reasons why error-free asset depreciation calculations are important to any organization.
Accurate Bookkeeping and Asset Valuation
The value of assets decrease over time and for organizations to value assets each year at their purchase price can be a costly mistake that affects taxable income, resale value of an asset and current financial records of an organization. The value of an asset is the sum total of the purchase cost minus the accumulated depreciation expense of an asset. Therefore, calculating the depreciation of an asset over time ensures accurate bookkeeping and asset valuation. If depreciation is not accounted for then organizations may overvalue assets in their balance sheets – which is both bad accounting and not permitted by specific provisions of law. In fact, there is legislation that legally requires some organizations to provide depreciation on fixed assets.
Having the right book value of assets is also important when it comes to filing tax reports. At the time of filing taxes, organizations have to prepare extensive cash flow statements. These statements detail the flow of finances into and out of an organization. Cash flow statements are taken from three business activities: operations, investing and financing. Investing activities include the cash spent on procuring equipment. Fixed asset tracking software helps organizations prepare these statements by keeping track of the value of all assets and their procurement cost. An efficient fixed asset tracking software provides a quick and easy way to pull up reports on the value of all assets and their depreciation over time.
Having accounting books reflect the most accurate asset costs is also important when it comes to calculating the total amount of taxable income of an organization. From an accounting perspective, assets are the items that help in generating revenue. However, every equipment that is used is subject to wear and tear which decreases the value of the equipment. This loss is considered as an expense incurred by an organization and must be deducted from the total income. Depreciation helps organizations save on taxes by reducing the total taxable income by the appropriate depreciation expense of assets. The higher the depreciation expense, the smaller the amount of taxable income and taxes owed.
Well-informed Financial Decisions
Using depreciation expense helps companies better match asset costs with its benefits and utility. With depreciation, organizations can easily compare the cost of an asset in one accounting period to the revenue that the asset helps generate in the same period. If organizations fail to account for this depreciation expense they may over or understate their total expenses and thereby run the risk of basing important budgeting and procurement decisions on faulty data.
Additionally, a fixed asset tracking software makes it easy to identify when items need to be retired. This can be when an item starts incurring more costs, maintenance or otherwise, than its actual worth or when an item’s value is equal to its salvage value.
How does Fixed Asset Tracking Software Help?
Asset tracking software makes tracking depreciation a breeze. All you have to do is enter in your asset details including purchase price, purchase date and depreciation percentage over time and leave the rest to the software. You can even schedule reports to be emailed to you detailing the value of all the assets you own. Additionally, fixed asset tracking software allows you to filter through all your assets and compare the value and usage of similar types of assets. Thereby, providing you with useful insights into the utility and value of all your assets. You can even use these extensive reports to compare the maintenance costs of your items and their actual value to you. This helps in identifying any equipment that is incurring more costs than its actual value!
Depreciation tracking within fixed asset tracking software helps organizations maintain sound financial records for better budgeting decisions and achieve error-free tax filing. This helps organizations meet legal requirements and avail opportunities for tax reduction. Keeping track of multiple assets and equipment manually is a difficult and time-consuming process. However, fixed asset tracking software automates this process and helps organizations track depreciation for multiple assets seamlessly. Reporting features of the software also help organizations easily identify equipment that has outlived its useful life and needs to be removed from accounting calculations or retired.