The Depreciation Tool Can Manage a Company's Finances (Business Info)

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--written by thewriter197
--employed by Ashford University




     The depreciation tool is a great tool for managing a firm (2017). It is also a great tool for evaluating a good a firm’s business is doing. This tool is used to determine how a company’s assets, utilities, and properties are doing. The main point of using depreciation tool for a company is to determine if a company’s cost of asset is lower then its asset production revenue (2017). The three methods that can be used with the depreciation tool are Straight Line Method, Units of Production, and Declining Balance Method (2017). Using the depreciation tool will also allow stakeholders know how a company is doing and how much money to invest with a company. The depreciation tool is a great tool for managing a company’s business because it determines a company’s asset value, provides methods for managing a company’s business, and gives stakeholders an idea of how much money should be invested in a particular company.
     Depreciation is a tool for eventuating and managing a firm. Depreciation is used by recording the cost of a fixed asset (2017). Every company has property that is connected to produce revenue. Examples of a fixed asset are buildings, furniture, leasehold improvements, and office equipment (2017). Land is not a fixed asset because land is something that never runs out (2017). Land does not have an expiration date. The fixed assets used for the depreciation tool have to be things that run out. The depreciation tool is designed to record revenues associated with expenses (2017). This allows a firm to see if their expenses are producing the appropriate revenue (2017). The firm will also be able to see its revenue generating assets (2017). It can be difficult to determine the amount of revenue from a company’s fixed assets. “We incur a steady amount of depreciation over the useful life of each fixed asset, so that the remaining cost of the asset on the company's records at the end of its useful life is only its salvage value (2017).”
     There are many methods used for the depreciation tool. One of the methods used for the depreciation tool is “Straight Line Depreciation.” The Straight Line Method is the default method for reducing the expense amount of an asset for its useful life (2017). This method is for determining the consumption of an asset and is used when there is no pattern for a firm’s asset (2017). This method is the easiest method to use because it produces few errors when calculating. The first step, determine the beginning cost of the fixed asset (2017). Next, subtract the estimated salvage amount from the amount recorded in the books (2017). The third step, determine the useful life of the asset (2017). The fourth step, is to divide the estimated useful life into 1 (2017). Doing this will determine the rate of Straight Line Depreciation (2017). The final step is to multiply the depreciation rate by the asset rate (2017). Doing these steps will allow you to reduce the carrying amount of an asset. A time to use the Straight Line Method would be when a company buys a machine for work. Here is a math example listed below.

(Example): 
“1. Purchase cost of $60,000 – estimated salvage value of $10,000 = Depreciable asset cost of $50,000 (2017).”
2. 1 / 5-year useful life = 20% depreciation rate per year (2017).”
3. 20% depreciation rate x $50,000 depreciable asset cost = $10,000 annual depreciation (2017).”

     Another method with the depreciation tool is “Declining Balance Method.” This method involves applying the depreciation rate to the non-depreciated balance (2018). This method within the depreciation tool is designed to closely match the expenses of an asset to its revenue. The method is also used to determine the amount of depreciation of something from year to year (2018). This method expenses the asset at a constant rate instead of looking at the useful life of an asset. This process will show a declining depreciation charge each succession period. In other words, a percentage is added to an asset that determines the depreciation cost rate year to year. For example, “ if an asset that costs $1,000 is depreciated at 25% each year, the deduction is $250.00 in the first year, $187.50 in the second year, and so on (2018).” Using this method will show you the rate of depreciation of a fixed asset from year to year. It will tell you how long an asset will last much longer from year to year estimates. You can use method for machines such as cars, dishwashers, generators, and chainsaws. Each of these machines lose value over years.
     The third method used in the depreciation tool is “Units of Production.” A method for giving depreciation rates to asset’s usage (2017). A firm can charge more depreciation cost when usage of an asset is less, but it can also charge more depreciation cost when asset’s usage is more (2017). A firm is suppose to give a cost of each asset being used in depreciation year to year so they can determine how well an asset is doing. This method also requires someone to track the usage of each asset (2017). This method is accurate for determining how long an asset will last because it closely show a firm the wear on assets (2017). This allows a firm to determine how long an asset will last accurately. It show the exact rate of each asset’s depreciation. Knowing an assets depreciation will help a company determine its revenue and self worth. The first step to calculating using this method, is to estimate the total hour of usage. The next step, subtract salvage value from calculated cost and then divide by estimated hour of usage from net depreciation cost (2017). Final step, “multiply the number of hours of usage or units of actual production by the depreciation cost per hour or unit, which results in the total depreciation expense for the accounting period (2017).” This method is designed to accurately determine the depreciation and revenue of an asset accurately from each piece of a company. An asset example to use for this method is “pensive dirt.” This dirt is used to keep gravel stable for a company. Using this method for small assets that connect together will allow the company to know how much of an asset is needed for a company.
     Does a firm’s tax planning influence the decision of using the depreciation tool? Every firm has to pay taxes to the country they live in. Some call it “country rent.” Each firm has the ability to lower their taxes if they use the depreciation tool (Tarver, 2018). This tool will will reduce the cost of assets by letting a firm know how long an asset will last. Each asset has a depreciation rate that must be calculated with math. “A company's depreciation expense reduces the amount of earnings on which taxes are based (Tarver, 2018).” Because the company uses less assets because of using depreciation tool, they will be required to pay less in taxes for those same assets. If a company uses the depreciation tool, they will be able to reduce tax fees owed to the country they do business on. Each company’s asset has to be taxed which means that each asset has to be managed properly to reduce cost. A great way to manage the useful life and production revenue of an asset is depreciation tool. Depreciation tool affects the amount of taxes a company needs to pay to the country’s government.
How do stakeholders look at the depreciation tool for a company? Stakeholders are investors who invest in a company’s assets or utilities (Friedman, 2012). Stakeholders look at a company’s depreciation rate of assets to determine how much money they want to invest in a company’s assets (Friedman, 2012). If a stakeholder see that a company’s depreciation rates for its business is good, they might be more inclined to invest in that company’s property. The main purpose of the depreciation tool is to reduce the cost of expenses and purchase assets that have decent life value. A firm must use the depreciation tool to help their business reduce cost of asset usage and get more stakeholders to invest in the company. When a stakeholder chooses to invest in a company, they need to know all things that make a company. One of the things a stakeholder needs to know is the rate at which the assets are dying off and the rate of production for each asset.
     In conclusion, the depreciation tool is a useful tool for managing and evaluating a company. It reduces a company’s taxes by telling them what assets are reliable and for what period of time. It gets more stakeholders to invest in their company by showing stakeholders that their assets depreciation rates are stable. It provides simple methods for determining the rate at which an asset is going to last for a company and determine if the revenue outweighs the expense. Overall, the depreciation tool determines how a company’s assets or utilities is doing over a long period of time. This method is used to determine if an asset or utility for a firm is really doing well. The mathematical calculations must be performed to accurately determine what is really going on in a company’s business. Math does not lie 90% of the time. The math used in the depreciation toll will accurately tell you if a company is doing well.

















Reference:


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Tarver, Evan. (2018, Feb. 14). What is the Tax Impact of Calculating Deprecation. Retrieved from URL: https://www.investopedia.com/ask/answers/031815/what-tax-impact-calculating-depreciation.asp.