![]() ![]() The depreciable basis of an asset includes all the costs to acquire the item and place it in service. To calculate depreciation expense, you need to know four things: At the end of every accounting period, a depreciation journal entry is recorded as part of the usual periodic adjusting entries. When assets are purchased, they are reco rded at their historical cost in an asset account on the balance sheet. This helps to ensure that company revenues are matched with the costs of assets used by a company to generate that revenue. In accounting, depreciation is the process of allocating the cost of an item over its anticipated useful life. Outside of the accounting world, depreciation means the decline in value of an item after purchase. Depreciation is how we solve that problem. Those big swings in expenses distort income, making company performance seem worse or better than it really is. But if you write off major asset purchases when you buy them, that violates matching: you get a big deduction the first year, but nothing after that, even though the company will continue to benefit from them for years to come. The matching principle in GAAP accounting requires us to match revenues with the expenses that generate that revenue. These are purchases that will benefit the business for more than a year. ![]() The best examples are computers, office furniture and company cars. ![]() Fixed assets are purchases your company makes that add value to the business and that help your company make money. Every company has fixed assets, and you’re probably reading this on one right now. ![]()
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