Depreciation – Useful Life, Or Economic Life

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Depreciation – Useful Life, Or Economic Life

Depreciation is the accounting definition for a reasonable estimate, in financial terms, of the depreciation of an asset over a period of time. Since most assets are capitalized on the balance sheet, in the financial statements, “depreciation expense” is provided as an expense on the income statement.

There is much debate about depreciation in accounting circles, as it is difficult to establish what constitutes a “reasonable estimate”. Moreover, until recently, it was accepted that land and buildings cannot depreciate, but appreciate. However, recent developments have now proposed depreciation on buildings.

Property tax “write-offs” further complicate the matter, as the statutory rates set for tax deductions exceed depreciation rates, creating a discrepancy between tax values ​​and book values ​​of assets.

I believe that asset accounting can only be done with the help of an astute accountant. Accountants’ expertise in fixed asset registration, accounting standards and a solid understanding of tax law are important.

When tax write-offs on assets are high, the tendency in accounting is to depreciate the asset in terms of its useful life, not its economic life. The fixed rate for computers in tax will be three years or 33, 3%. (Depending on the country’s tax system).But the business can only use it for 6 months and sell it as scrap. This 100% provision for depreciation, as useful life, should be factored in. Office furniture can be used for 5 years, and then written off, but the tax rate for tax write-off can be written off for four years!

The rate at which businesses depreciate their assets coincides with the asset’s economic life. Therefore the accepted economic life is the useful life of commercial property.

In non-profit organizations and other community institutions, such as churches etc. The picture becomes very confusing. Churches will retain assets such as furniture for up to 40 years. Businesses that typically upgrade computers every 6 to 12 months are used for 3 to 4 years!

So if the useful life method is applied, for non-profits, the depreciation rate of assets can be as low as 2%. Accounting standards expect fair presentation. Depreciation rates, for nonprofits and other community organizations, should be applied carefully.

No one expects a business owner or director of a non-profit organization to understand these concepts, at least to ensure that a proper asset accounting system is in place.

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