[ad_1]
Assets, such as buildings and cars, decrease in value over time and are prorated over their expected life as depreciation. Depreciation for accounting and tax purposes differs and can be calculated using straight-line or accelerated methods. Real estate depreciation is calculated by deducting the value of the land from the total purchase price.
An asset is a tangible item that has monetary value, such as a building, car, computer, or bookstore. Most assets wear out and decrease in value, or depreciate, over time. If a firm purchases an asset that has a life expectancy of more than one year, it cannot write off the entire cost as an expense in the year it is purchased. Instead, the cost is prorated over the expected life of an item and this amount is deducted as depreciation of the asset.
In accounting, an asset is depreciated differently for the statement of profit and loss than it is for income tax purposes. Depreciation of business assets is based on the actual time the business expects to use the item, while depreciation for tax purposes uses a life expectancy based on property class and determined by the authority government tax. For example, a business may purchase a car that it intends to use for only three years, then the depreciation of the assets will be spread over three years for the income statement. The tax code, however, may require a vehicle to depreciate over five years, so a different calculation is used when preparing tax forms.
Depreciation of assets can be calculated using a straight-line method or some form of an approved accelerated method. The straight line is relatively simple to calculate; the cost of the item is divided by the number of years of expected life, and an equal amount of depreciation or cost deduction is taken each year. Using this method, an item that costs $5,000 US Dollars (USD) and has an expected life of five years will be deducted or depreciated at a rate of $1,000 USD per year. If the item is purchased or put into service at any time other than the first of the year, an adjustment must be made to the first and last year of the asset’s life.
Accelerated depreciation forms are based on pre-established formulas or charts and are frequently modified by legislative bodies. In times of economic prosperity, the amount of acceleration allowed can be reduced and the life expectancy of the asset class can be extended. During economic downturns, governments can increase the amount of initial depreciation allowed and shorten the life expectancies of the classes to encourage firms to increase spending on real estate.
In the US, the full cost of the asset is allowed to be deducted, while the UK and Canada assign a salvage value to an item that cannot be deducted. If a car costs $10,000 USD and has a salvage value of $1,500 USD, the depreciation of assets will be capped at $8,500 USD in those countries. Both Canada and the United States allow depreciation as an income tax deduction. In the UK, depreciation is calculated solely for the purpose of determining a company’s equity. Depreciation is added to net income for tax purposes and a percentage of the cost, called the capital allowance, is deducted from the yield.
The calculation for real estate depreciation is different and is not based on the cost of the entire property. The universal assumption is that the land on which buildings stand will last forever and therefore no depreciation is allowed. The facilities, however, wear out over time and need to be refurbished or replaced. To calculate the depreciation of real estate assets, most countries require the value of the land to be deducted from the total purchase price to calculate the share allocated to structures that can be depreciated.
Smart Assets.
[ad_2]