All companies—large, mid-sized, and small—have a portion of their overall value in fixed assets. A company’s fixed assets can include the building where it does business or items and equipment it uses, such as printers and furniture. Accounting professionals know that over time, the monetary value of a business’ fixed assets decreases. This is referred to as depreciation.
If you’re planning to enroll in an accounting training program, read on to learn how depreciation will play a major role in your future career.
A company’s fixed assets are usually classified as items or property that will last more than a year, but not forever. A computer, for example, might be in working condition for a few years, but will eventually need to be replaced by an updated model, or will stop working all together.
During each accounting period (week, month, quarter, year), part of the cost of every company asset gets used up. Once you graduate from your accounting training program, you will likely consider depreciation in order to match a portion of the cost of a company asset to the revenue that it generates for the company over time.
Experts admit that it’s difficult to directly link assets to exactly how much revenue they generate. That’s why accounting professionals—like bookkeepers, for example—calculate consistent depreciation over the useful life of all assets. By the time an asset has reached the end of its useful life, its remaining cost in the accounting records can be what the item is worth if it is sold. This is referred to as its salvage value.
After completing your accounting and payroll administrator course, you’ll learn that depreciation, like other company accounts, gets recorded with journal entries and then added into a ledger at the end of an accounting period. When you record depreciation, it gets entered as a debit to a depreciation expense account and as a credit to an accumulated depreciation account. Here are a few factors you’ll consider when calculating depreciation:
Useful life – This is the period of time that a company expects an asset to be productive. Company vehicles, for example, are typically considered useful for approximately 10 years. Most companies dispose of assets when they’re no longer needed for operation, but can still be salvaged.
Salvage value – When a company eventually disposes of an asset, it still may be worth something. Depreciation is calculated based on how much an asset cost the company, minus any salvage value an asset might have when it’s no longer of use.
Sometimes, halfway through the useful life of an asset, companies can expect the salvage value to change. For instance, if they own the building where they operate, real estate values can go up or down. When this happens, you’ll be required to calculate the differences of value into the remaining useful life of an asset without having to go back and change your past entries.
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