Nowadays, accounting software has become a vital necessity in any business. Accounting systems (also called accounting applications) are designed for accounting professionals to manage accounts and simplify financial operations within organizations. When you start running a business, you will inevitably come across terms like ‘Fixed Assets’ and ‘Asset Depreciation’ without really understanding them. One of the jobs that can be completed using accounting software is calculating asset depreciation. Therefore, before discussing the important role and calculation of asset depreciation in the world of accounting, you must first understand the understanding. The term depreciation for many is a form of business and business losses.
Depreciation is the systematic decline of a fixed asset’s carrying cost until the asset’s value is zero or has no economic worth. Depreciation permits a fixed asset’s cost to be deducted from income. With so many assets to handle, manual means are not an option. sing the best accounting software can help you save time. Systems that are integrated with other software are one of the benefits of accounting software that can ensure the data managed more accurately and in accordance with the field.
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What Is Fixed Asset?
Fixed assets are the tangible assets that a company owns and uses for more than a year to obtain profits. They are not for sale. When you own a fixed asset, any cost during its usage does not represent a cash transaction, but it plays an important role in the balance sheet. Therefore, a fixed asset does not have any immediate effect on your profit. Asset software management has several features that also can help calculate depreciation.
What is Depreciation?
Depreciation is an accounting method that allocates the cost of fixed assets during their usage period and describes the declining value of the asset from the time since you purchased it.
For example, you have a car for your business operations. The car is a fixed asset. You can use this asset for years. However, due to several factors such as physical damage, declining economic value, and time, this car loses its productivity from time to time. This is what asset depreciation is.
Depreciation is an expense in the company’s balance sheet, according to the estimation of fixed asset usability used during the utilization period. For example, there is an expense for maintenance from when it was purchased until it lost its utilization. It means that this expense has deduced the net profit. Due to its effect on profit calculation, you must record the asset depreciation.
What Kind of Trouble If You Do Not Calculate Depreciation?
After knowing the understanding of depreciation in general in the world of accounting. So now you need to know the important role of calculating asset depreciation to support the business. There are several things that will happen if you do not take into account the depreciation of the asset. Of course, this impact is not a good thing for your company. Here’s the impact that may occur when you don’t take into account asset depreciation.
Distorted Business Value
If you do not depreciate your capital asset value correctly, you won’t see its real value. Eventually, it will cause financial position inaccuracy in the company. The value of an asset will be over in the books of accounts. If the asset value is higher than the actual value, then the books of accounts show a higher profit.
At the same time, negligence of depreciation may sometimes hide the losses incurred in the business. This is not good for your business because the not calculated profit and loss will affect your business’s health. In addition, you will confuse the prospective investors due to profit uncertainty, and it will impede you from increasing your capital.
Because your profit is over without depreciation, your return tax may be higher than the original tax amount. Other than that, you will have errors in capital expenses deduction for tax returns. It will not be a trouble if it’s just a basic mathematical error. The tax department can fix the trouble without having to contact you.
However, suppose there’s a huge amount of differences in tax return calculation. In that case, the tax department may conduct a formal investigation for your business and re-audit the amount of your tax return. Again, your company’s credibility is at stake.
Incorrect Asset Utilization Period
If you don’t calculate or consider the depreciation, you won’t know when to replace the assets and maximize their utilization period. You can be late in replacing the assets which have lost their productivity. It will decide your business operation. It even worsens if you do not prepare any budget for it.
You might want to consider applying ERP that includes Accounting Software, for a precise depreciation calculation. It will help you locate, track, maintain, and predict the utilization period of the fixed asset. Therefore, you can keep a distance away from those troubles.
To avoid these problems, it is certain that depreciation calculations must be on your books. However, manual calculations will take a lot of time and the risk of incorrect data input is quite large. To get the accounting calculations right, you can try the Accounting Software that is in ERP. You can also integrate the system with the Purchasing System to help you control the procurement of new assets or services from qualified vendors. Schedule a free demo now to experience the transformational power it brings to your operations.