Depreciation Benefits

Keep a record of depreciation in the general ledger.

Companies record depreciation to recognize that assets wear out from general use and aging. Firms use a number of methods to calculate depreciation, the choice depending on the asset in question and individual preference. Regardless of the method a business uses for depreciation, there are a number of benefits to recognizing this expense.

Taxes

Recording depreciation reduces the amount of taxes a company owes.

The IRS allows businesses to deduct depreciation expense when calculating taxable income. If a firm does not record depreciation, it is paying more in taxes than it should. For instance, a delivery company that earns $500,00 in income and records $50,000 in depreciation for its ten trucks only has $450,000 worth of income to pay taxes on.

Generally, a firm must own an asset and use it for more than a year to claim depreciation. Common items businesses can depreciate include furniture, vehicles and computers. Land is not subject to depreciation, but property improvements such as landscaping are.

Accurate Reporting

Accurate financial reports inspire confidence in a company.

Businesses include depreciation in their income statements. Although including this expense reduces a company's bottom line, it benefits its investors and creditors by providing a more accurate view of the business. An investor might want to know, for example, if a delivery company's trucks are in good enough condition to continue generating income for the company.

Compliance

Falsely reporting depreciation is illegal.

Recording depreciation not only increases the accuracy of financial reports, but is required by generally accepted accounting principles (GAAP). Because failure to record depreciation results in misleading financial reports, the Securities & Exchange Commission (SEC) could investigate a company for not reporting depreciation. Understating or hiding depreciation constitutes fraud, so recording it accurately gives a firm the benefit of remaining compliant with the law.

In 1998, the SEC filed charges against the founder of Waste Management, Dean Buntrock, for falsely reporting depreciation to reduce the company's expenses on paper.

References

• Fraud Cases: Violations of Generally Accepted Accounting Principles (GAAP)
• Depreciation Under GAAP (For Book Purposes)
• IRS: A Brief Overview of Depreciation