Depreciation refers to the lost value of an asset over time. Your assets will either appreciate (increase their value) or depreciate and decrease in value the longer you hold them. Tracking depreciation can help you better understand the value of your existing assets—and therefore, the value of your business.
This guide can help you learn which items are eligible for depreciation on your income statement and balance sheets.
What Purchases Are Eligible for Depreciation?
Each company has different assets and liabilities that can be included in income statements to record its depreciation. A few examples include:
- Equipment related to production (machines, tools, appliances, etc.)
- Technological assets that you use (computers, POS systems, company phones)
- Fleet vehicles (cars, trucks, and tractors related to the business)
- Furniture (office chairs, customer waiting couches)
- Some types of inventory (like clothing that can quickly go out of style)
- Additional miscellaneous assets that lose value
Once you see examples of items that can depreciate, you can better understand how they lose value over time. For example, if you purchased a delivery van for $40,000, it would slowly lose value each day from wear and tear as you use it. The brand-new TV you purchased for the waiting room will be worth less 2 years from now than when you purchased it.
Essentially, any business asset that you purchase and expect to be valued less than your original price at a later date is a depreciating asset.
How Do You Track Depreciation?
There are multiple ways to track depreciation related to your assets. Some tax professionals have depreciation formulas they use for different assets that can be applied to your items. For example, they could deduct a certain amount each year based on the estimated value loss.
You can also calculate depreciation manually through market research. You can check the resale value of a car through Kelley Blue Book based on how well you care for it. You can also see what similar assets sell for online if you were going to list yours. This process can be more cumbersome, especially if you have several depreciating assets.
What Is Depreciation Used For?
You can track depreciation to understand what your business is worth if you were to value it for sale, use it as collateral, or liquidate your assets. For example, if you were to take out a loan and use your delivery van as collateral, your lender will want to see proof of its value.
If you have an old van with a low resale value, you might not be able to borrow against it. However, if you know what it is worth, you can confidently offer it as an asset to the bank.
Track Your Assets to Make Sound Business Decisions
Tracking depreciation can also help you understand when it is time to replace assets with no value. If you use the same equipment for several years and it cannot be sold, then its value is lost, and you can start planning to buy a new machine when that one breaks beyond repair.