Whenever an asset is purchased for the long-term, it should be capitalized instead of being expensed in the accounting period it is purchased in. Assuming the quality is going to be economically helpful and generate returns on the far side of the initial accounting period, expensing it instantly would overstate the expense in that time and will represent it in the future. For avoiding this, depreciation is used to better match the expense of a long-term asset to periods it offers benefits or to the revenue it generates. Also, there are many ways used to calculate depreciation, and also the kind is usually selected to match the nature of the equipment.
In this article, you will know about the several advantages of depreciation expense. You can also check out quantity surveyor services in Perth.
It helps the enterprise properly mention the amount of expense incurred as a result of using an asset throughout an accounting period to properly match with the revenue that the asset use intends to get within the same period. If enterprises understate or overstate total expenses and do not mention correct assets purchase cost to depreciation expenses, it may lead to misstate revenues, reporting misleading financial information.
Depreciation expense may help enterprises to mention appropriately report assets at their net book value. Normally, enterprises record fixed assets at their original purchase costs. As time passes the value of assets declines over time as asset usage that likely causes an asset’s wear and tear. However, an enterprise needs to adjust an asset’s value to its net remaining value. The amount mentioned in the asset’s net book value is the original cost of the asset purchased and subtracted by the asset’s value to its net remaining value.
Depreciation expense may recover the purchase cost of an asset. Like asset expensing through which companies may recover the cost of an asset immediately, by using asset depreciation, enterprises recover total asset cost over the useful life of the asset through periodic depreciation expense. Depreciation expense allows enterprises to set aside part of the revenue as funds for future asset replacement as it is a non-cash charge against revenue. In absence of charges of depreciation expense, the portion of revenue may need been inappropriately used for different purposes.
Enterprises can also save tax. As mentioned in tax rules, depreciation expense may be used as a tax deduction against revenue arriving at taxable income. The lower the depreciation expense, the higher the taxable income and, thus, the less the tax savings and vice versa.
It gives a way to recover the purchase cost of the asset where your enterprise may recover the total asset cost over its useful life. Additionally, it becomes simpler to ascertain if these assets are in need of replacement or not. Thus, depreciation helps enterprises to set aside part of the revenue as funds for the replacement of the worn-out asset.