The topic of fixed asset depreciation can be a daunting one for business leaders, especially those who are new to the concept. But understanding asset depreciation is an essential part of effectively managing and tracking assets in today’s IoT-driven world.
This comprehensive guide will help equip you with the knowledge and tools to make educated decisions about how best to manage your physical assets and maximize their value over time.
What Is Fixed Asset Depreciation?
Fixed asset depreciation is the decrease in value or expense of physical assets over a certain period of time. It is an accounting concept used to determine the true cost of ownership of company assets, like machinery, buildings, and other long-term investments.
This depreciation amount is allocated over the estimated useful life of a fixed asset, taking into account factors such as economic and market conditions.
By recording fixed asset depreciation on your books, you can plan for proactive maintenance and repair needs of physical assets, as well as develop your budget for upcoming asset purchases.
Why Is It Important For Businesses To Track Fixed Asset Depreciation Correctly?
Tracking fixed asset depreciation correctly is essential for businesses in order to remain compliant with tax law, but it can also empower a business to make smarter financial decisions about the assets on its balance sheet.
Depreciation of fixed assets provides a clearer understanding of their long-term value and allows the company to weigh its costs and benefits over time, calculating an annual depreciation rate.
Furthermore, accurate fixed asset depreciation tracking can give businesses an edge when determining which pieces of equipment should be replaced or upgraded before they are fully depreciated – allowing them to invest their resources strategically, which of course, will ultimately create better returns in the long run.
What Factors Should You Account For When Calculating Fixed Asset Depreciation?
There are three important factors to consider when calculating fixed asset depreciation. These include the salvage value, the asset’s useful life, and the method of depreciation chosen.
- Salvage value refers to the residual value of a physical asset at the end of its useful life.
- Asset useful life is the estimated number of years that a tangible asset will remain in use before it can no longer be used (and thus has zero salvage value).
- Lastly, the depreciation method describes which formula should be used when allocating physical asset costs against income over their useful life.
Understanding these factors is key to ensuring accurate fixed asset depreciation calculations. So, let’s dive a little further into those specific methods of depreciation.
The Different Methods Businesses Can Use To Calculate Depreciation Of Assets
Calculating fixed assets depreciation can be challenging, but with a proper understanding of the different methods businesses can use, it becomes easier.
- The straight-line depreciation method is a popular choice as it simply divides the asset’s cost by its useful life in order to determine the fixed asset’s value each year.
- The double declining balance method is a more efficient option, allowing businesses to accelerate fixed asset depreciation by doubling the straight-line method rate of depreciation.
- The units of production method allow businesses to calculate fixed asset depreciation based on the actual use or output of an asset.
- Lastly, there is the sum of years digits method, which calculates fixed asset depreciation by finding a fraction composed from the number of periods that have elapsed over the total number of estimated periods.
All of these methods will ensure company assets are accurately depreciated for business records and taxation purposes. However, the right method for depreciation is largely dependent on the business and the nature of its fixed assets.
How To Determine Which Fixed Asset Depreciation Method Is Best For Your Business?
Determining which fixed asset depreciation method is best for your business can be daunting – but it doesn’t have to be.
Generally, you should use the same depreciation method for all physical assets within a specific asset class, as this will save time and improve accuracy.
That said, it’s perfectly acceptable – and quite common – to use multiple methods across different asset classes.
So if you have one type of asset that you need to depreciate over several years and another that requires immediate write-off, it may be more beneficial to assign separate depreciation methods to each group.
Ultimately, whatever asset depreciation method you ultimately decide on must satisfy tax regulations and bring accurate results while saving your business as much money as possible.
What Tools Can Be Used To Help Streamline Fixed Asset Depreciation?
IoT asset tracking and management solutions can vastly simplify fixed asset depreciation by providing organizations with real-time visibility into the condition of their physical assets.
With cloud-based tracking systems, users can accurately track asset purchases across geographically distributed locations, as well as keep tabs on asset maintenance and journal entries. This allows fixed depreciation to be calculated more precisely and quickly.
Additionally, having access to the whereabouts of company assets makes it easy to ensure that no item is going unaccounted for during the depreciation process. This level of visibility can even help with extending the useful life of the asset.
By streamlining fixed asset depreciation through an IoT asset tracking system, organizations can manage critical assets with greater efficiency than ever before.
The Benefits Of Using IoT Asset Tracking And Management Software For Depreciation
IoT asset tracking and management software provide a cost-effective solution for fixed asset depreciation. This type of software gives companies access to diversified tracking, alerting, and reporting capabilities, allowing them to take an active approach to fixed asset management.
The software allows users to monitor fixed asset depreciation over time, reducing the risk of capital investments underperforming.
Asset tracking can help detect obsolescence in fixed assets and ensure timely replacement, as well as audit fixed assets to improve accuracy in financial statements instead of relying heavily on manual checks.
In addition, automated fixed asset depreciation calculations will reduce the amount of manual labor required while improving accuracy by eliminating the opportunity for human error.
Overall, using IoT asset tracking and management will give companies more control over fixed asset depreciation decisions with increased transparency in their fixed asset operations.
Simplify Fixed Asset Depreciation With Radiant’s IoT Asset Tracking Solution
Regardless of the depreciation method your business chooses to use, the goal is always to generate an accurate portrayal of your company’s finances.
This ensures that you are making sound decisions based on data-driven insights that reflect reality. And while there are many methods for calculating depreciation, each with its own unique benefits and drawbacks, businesses can simplify the process by using IoT asset tracking software.
Radiant’s solution not only takes into account all of the key factors necessary for accurate fixed asset depreciation measurements but also offers a comprehensive suite of features to streamline the entire process.
So if you’re looking for a way to make fixed asset depreciation easier and more efficient, request a demo of our solution below.
Last Updated on February 2, 2023 by Radiant