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accounting Business

Why Record Depreciation?

For a new business, few things are more important than knowing your numbers and making sure you’re either profitable or improving the possibility of being profitable, especially early on when money is generally tight.

One of the biggest headaches for a business owner is understanding why their accountant insists on putting in a phantom expense on the profit and loss. Depreciation shows up without fail every month, hurting your perceived profitability.

So Why Do I Have to Track and Record Depreciation?

The main reason recording depreciation is so important is because it represents the wear and tear on your long-lasting property, plants, and equipment. Even though it may not feel like a real expense, it very much is. 

Accounting is not a perfect language, but depreciation is the best way us accountants could think of to show the effects of wear and tear over time. 

Spreading the expense of a large purchase over many years on the profit and loss statements ensures that one year’s profit and loss statement is not seemingly severely under-profitable while future years are seemingly over-profitable. 

Spreading this out over many years and showing the expense against each subsequent period’s income better reflects the utility of a large purchase and its wearing down over time.

Is There Any Other Reason to Track Depreciation Expense?

Another big reason to track property, plant, equipment and their subsequent depreciation schedules is for capital expenditure planning.

Capital expenditure planning is essentially the planning for large purchases. Looking at a depreciation schedule periodically shows the wearing down of large purchases and when to expect to have to replace them with new ones.

Obviously these purchases are expensive, so it’s important to plan how to finance them, either through saving up the money or potentially obtaining financing from a bank or line of credit.

 

Thank you for reading, and to have your question featured in a future post, please leave a comment below!

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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