Depreciation
- What is the importance of Depreciation
- how to count it?
- What is depreciation
- how it is important in the company's accounts
the impact it has on the company's income and tax is well known. You will also understand how these small information is important to understand the financial results of the company.
Depreciation
Depreciation is the way to allocate the cost of a tangible property according to its value so that its actual value remains in the account or balance sheet. The value of long-term properties is reduced for both tax and accounting objectives in any business.
For tax purposes companies can reduce the cost of real assets purchased as their business expenses. How much and when companies will depreciate is prescribed in income tax rules.
Accounting of Depreciation
Accounting students often find depreciation a difficult concept because it does not represent real cash flow. Depreciation is an expenditure in which no payment is made from the bank or cash. The expenditure of Depreciation is increased by reducing the value of the property directly in the accounts.
How to Calculate Depreciation
Depreciation expenses for accounting purposes do not represent cash transactions, but it shows how much value a business has used that property over a period. Suppose the company buys a machine for 5 lakhs and the average age of that machine is 10 years.
Now, according to the average age, the price of that machine is coming down to less than 50,000 every year. Now, if the price of that machine is 5 lakhs in the accounts of the company, after one year of use, the price will be reduced to 4.5 lakhs and this 50,000 will be put in Depreciation which is an item of expenditure. The company will also get the benefit of income tax on this expenditure.
Thus, at the end of the year, the company's balance sheet will see assets worth 4.5 lakh and the income will be reduced by 50,000.
Depreciation Rate
Depreciation is levied at different rates for different types of properties. It has a low rate on machines and plants. The car lives a little more on the vehicle etc. For computers and other electronic gadgets or machines whose technology changes quickly, the rate of depreciation is very high.
real impact
It is understandable that the company has not actually paid for this expenditure item, so the depreciation is added back to the net profit while counting the Ebitda.
Now it is understandable for the investor what kind of business the company is in and on what property this Depreciation. It is only by understanding this that the investor can find out whether the Depreciation imposed is really affecting the company's profit and how much.
Hopefully, after reading what is Depreciation, you will be realizing how understanding some small things contribute to understanding the results of companies. All this information can be beneficial for any investor to become a good investor.
Hi , This is Pramod Choudhary from Nagaur Rajasthan India. I an student and I would like to share my positive thinking with everyone that's my passion . Thank you
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