By Phil Harwood
“Why don’t my loan payments show up on my Profit & Loss statement? If I pay cash for equipment, does that change depreciation expenses? What is the meaning of book value? I heard of someone using their equipment equity as collateral to secure a line of credit – is that even possible?”
If you’ve ever asked yourself any of these questions, or similar ones, you’re not alone. In my experience, rarely do I meet someone who has a solid handle on accounting for equipment. Most contractors are a bit challenged by the complexity involved. This is why we recorded a new course in GrowTheBench – to walk our subscribers through the ins and outs of this unique type of accounting.
One of the most confusing aspects of accounting for equipment is the concept of depreciation. The purpose of depreciation is to account for the decline in the value of equipment due to aging and “wear and tear” of equipment over time. As equipment is used and as it ages, it becomes less valuable. This decline in value is what is called depreciation in an accounting system.
Depreciation is shown as an expense on your Profit & Loss statement (Income Statement) but it needs to be manually calculated and entered. Most companies have their CPA calculate depreciation due to the many different regulations related to taxes and different ways to calculate depreciation.
When calculating depreciation, there are three big decisions to make. First, the number of years of useful life for the piece of equipment must be established. Second, a residual or disposal value at the end of the useful life must be determined. Third, a method of depreciation must be selected. Depreciation expense may be increased or decreased dramatically by changing any combination of these three decisions.
Depreciation is an expense, as mentioned above. It is also used to reduce the value of the piece of equipment on your Balance Sheet. The value of your equipment is listed as an Asset in your Balance Sheet. This value is called Book Value. Each time depreciation is calculated and taken as an expense, the exact same amount is taken from your Equipment account in your Balance Sheet. Remember that the purpose of depreciation is to properly account for the value of your equipment.
Also keep in mind that the regulations for tax accounting are complex and always changing. Your CPA or accountant is the best person to seek advice from regarding depreciation and its impact on tax liability.
Are you interested in learning more? Stay posted. We will soon be releasing this new course. You will not want to miss it!
Tags: Equipment , Accounting , Book Value , Loans , Credit ,