Your organisation’s fixed assets – whether they take the form of buildings, furniture, computers, vehicles, or all manner of other items – will inevitably play a great role in its destiny. They will certainly make a big difference to the effectiveness of your day-to-day operations, as well as over a much longer timespan.
However, fixed assets also have a special significance in the world of finance. It is important that as an organisation, you account for the valuable equipment you have, so that you can ensure the most accurate bookkeeping and smoother workflows, while saving money when and where you can.
And when it comes to tracking your organisation’s assets, it is crucial to track the level of depreciation of those assets. This will have major implications for the financial decisions that your firm makes, including in relation to asset purchases and disposal, as well as tax reporting.
But what else does your organisation need to know about the importance of tracking the depreciation of its fixed assets?
What is asset depreciation?
As an organisation, you will have fixed assets that you will require in order to perform your duties and fuel your business’s growth. So, it will be necessary for your accountants to also factor in these assets when they are determining your organisation’s value.
Much of the equipment that your business invests in will continue to be owned and used by your workers for many years. Many of these assets are likely to depreciate in value over time as they accumulate ‘wear and tear’ and come closer to a stage at which they will need to be replaced.
And that, in turn, is likely to impact on the value of your organisation. After all, a business that has fairly new and sophisticated equipment that is likely to be useful for supporting the company’s growth for many years to come, is likely to be worth more than a business that has largely old and outmoded equipment for which replacement will soon be necessary.
Why is depreciation of fixed assets important to a business?
All the above helps highlight the importance of an organisation tracking the depreciation of its fixed assets over time.
This brings us onto the subject of depreciation calculations, which provide you with a means of spreading the cost of your business’s equipment over each asset’s lifetime. It means that your business doesn’t need to deduct a given asset’s entire purchase price from your net income in the same accounting year in which you bought it.
Let’s look below in greater detail at the reasons for the importance of accurate asset depreciation calculations to organisations.
Accurate bookkeeping and asset valuation
As we have established, the value of many of your organisation’s assets is liable to decrease over time. So, if you were to value your business’s assets at their original purchase price each and every year each given asset remains in use, this could be an expensive mistake, impacting on taxable income, the asset’s resale value, and your company’s financial records at a given time.
The actual value of a particular asset your organisation owns will be the sum total of what you paid to purchase it, minus the asset’s accumulated depreciation expense.
So, by calculating the depreciation of your assets over time, you can help ensure your bookkeeping and asset valuation are kept as accurate as possible. Failing to account for the depreciation of your business’s assets could lead to those assets being overvalued in balance sheets, which is hardly savvy accounting.
When your accountants are attempting to determine your organisation’s total taxable income, it is crucial that they have an accurate idea of your asset costs, so that these can be reflected in the accounting books.
From the point of view of your accountants, your company’s assets help it generate revenue, but will also typically be subject to ‘wear and tear’ over time, which will gradually drive down each asset’s value. Such a loss is effectively an expense that your organisation incurs, and which needs to be deducted from the total income.
Keeping track of the depreciation of your business’s fixed assets will help you lower your tax bill, because the total taxable income will be decreased by the appropriate depreciation expense of each and every asset. A higher depreciation expense for your business will equate to a lower amount of taxable income – and as a consequence, a lower amount of tax to pay.
Aids the making of well-informed financial decisions
Accounting for depreciation expense will help your organisation better compare how much your assets are costing you, to the benefits you get out of them. It will enable you to see the cost of a given asset in a specific accounting period, next to the revenue that the asset helped your business to generate during the same bracket of time.
If your organisation doesn’t factor in depreciation expense, its total expenses may end up being overstated or understated. Such inaccurate information would be a far-from-ideal basis on which to make crucial budgeting and procurement decisions for your organisation.
How can fixed asset tracking software help?
Depending on spreadsheets or even pen and paper for the tracking of relevant information about your fixed assets – such as their depreciation – might sound arduous and time-consuming. However, today, many organisations simply turn to fixed asset tracking software for this purpose, with Vision Pro’s own asset management platform being an excellent example.
Our fixed asset management software provides a secure, online-based system through which you can record and track your firm’s fixed assets, keeping all the relevant information in one place. It’s easy to tag assets to provide live data, and depreciation costs can be clearly identified to help your organisation with the all-important management of its budget.
To learn more about the complete feature set and functionality of Vision Pro, as well as to book a demo, please don’t hesitate to call our team today.