Dec 08, 2020

What Is Depreciation?

The assets that you have for your business can either appreciate (increase in value) or depreciate (decrease in value) over time. Understanding depreciation can help you to better track the value of your assets and, more importantly, your business. Keep reading to familiarize yourself with some of the details surrounding the depreciation of assets in your business.

Understanding Depreciation

Depreciation tracks an item’s lost value over a period of time. It takes into consideration factors like market value, the item’s condition, and supply and demand when valuing assets. Deprecation highlights how much your business lost in assets over a specific period. 

Which Assets Depreciate Over Time?

Every business has its own assets that increase or decrease in value. However, there are a few common assets which are known to depreciate:

Each of these items will depreciate at different rates. For example, a sofa in a waiting area may depreciate over a few months if it becomes torn or stained with food. Technology can depreciate if it becomes outdated, but it can also hold its value for several years if other inventions don’t become popular. 

How Do You Calculate Depreciation?

In the same way that items depreciate at different rates, you need to track the value in various ways. For technology, you can check the market value and see what others are paying for it right now. For fleet vehicles, you can use a service like Kelley Blue Book to check the going rate of a van or truck. 

Can You Prevent Depreciation?

The items in your business will depreciate over time, there’s no question. However, there are some instances when you can mitigate depreciation. 

Using fleet vehicles as an example: a company can service a delivery van regularly, drive it carefully across town, and avoid getting into accidents or damaging it with dents and scratches. Over time, the value will depreciate slower than if the company was more careless. 

What Is Depreciation Used For?

Depreciation helps you to track the real value of your company. For example, if you tried to take out a business loan, you could use your assets as collateral. If you know what your assets are actually worth (with depreciation accounted for) you can approach the bank or lender with a reasonable offer, and you’ll likely get more favorable lending terms. 

Tracking depreciation also tells you how much cash you could get for your business should you decide to liquidate. 

Let Us Help You to Understand Bookkeeping Better

If you are a new business owner or still trying to understand the basics of accounting and finance, the team at Sunrise is here to help you. Our resource center has multiple pages dedicated to covering key definitions, and we offer free tools that make bookkeeping easy for small businesses. Use our services to send invoices, import expenses, and keep your ledger organized for your accountant and investors.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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