How To Cure Bad Breath With Natural Remedies
Which Assets Can Be Depreciated?
What Is Asset Life Cycle Management

What Are Nontangible Assets?

Non tangible assets are those assets that cannot be touched physically. Can they be depreciated? Well the process is known as amortization which is similar to depreciation. Patents, computer programs, copyrights, trademarks, goodwill are all non tangible assets. If these assets have a finite useful life then these assets lose value due to expiration, obsolescence and other factors. In amortization the cost of the asset is reduced over time and is reported as an expense on the income status. Even pension schemes sometimes are amortized. Inventory cannot be depreciated because you use it for sale purposes and are likely to use it within a year.

According to the IRS there are certain guidelines for the depreciation of assets. The ownership of the assets should be in your name. Then the assets should be used in your business activity. Also the assets should have a determinable useful life. Lastly the expected life span should be more than a year.

In accounting depreciation does not represent a cash flow. In fact it stands for how much of an asset’s value the business has used over a period of time. The most common cause of depreciation are wear and tear, obsolescence, depletion and expiration.

Depreciation might sound negative especially when you buy and new car and from the moment you start driving the car’s value starts depreciating. But all is not bad. Coming back to depreciation, it is useful in saving tax. Yes you read it right. How? It’s simple; a depreciation expense reduces the profit or earnings and can be used in tax deductions. In simple terms higher the depreciation the more you save on tax?

Depreciation also helps to recover the purchase cost of the asset. Companies can do so by recovering the cost of an asset immediately using periodic depreciation expense. Depreciation expense is a non-cash charge against revenue, which allows companies to set aside part of the revenue as funds for future asset replacement.

What Is Amortization Of Intangible Assets

So PPE usually undergoes wear, tear or obsolescence. Hence the amount that we spend on assets usually leaves the asset. So we recognize this by recording it as depreciation expense for a cost over long period of time. Capitalization of long term asset does not in any way mean you never expense the cost of an asset. It just means you don’t do it at once but instead use spread out the expense over to the assets full life. Keeping this principle in mind, land can never be capitalized simply because it has an indefinite life span.

Properties like buildings, machinery, equipment, vehicles, furniture and fixtures, equipments, computers and all tangible assets other than land and gold can be capitalized. Intangible assets such as copyrights, trademarks, bonds, stocks, long term pension schemes cannot be capitalized.

In fact they are expensed with a special form of capitalization called as amortization. US accounting guidelines popularly known as GAAP (Generally Accepted Accounting Principles) permit businesses to capitalize intangible assets through a process known as amortization. The costs of intangible assets that are purchased from independent party are usually recorded as assets. Goodwill for instance is capitalized for the excess of the purchase price of a business’s asset or stock over their fair value.

Certain costs too can be capitalized in case of intangible assets. Costs such as legal fees, costs related to successful defense of patents, trademarks or copyrights incurred to obtain the asset.
The value of intangible assets reduces over time; this decrease is known as amortization. For intangible assets with definite life, the amortization can be calculated dividing the capitalized cost by the assets economic life. Assets with indefinite lives are not amortized but are checked for impairment.

There is a huge chance of businesses committing fraud by placing regular business expenses as capital investment. Showing these costs as assets instead of expenses makes them show higher profit. This amounts to fraud.

What Is Asset Life Cycle Management

Business means increasing your wealth. This can be done through smartly applying for tax deductions. This can be done through depreciation. Long term assets such as PPE depreciate and hence these come under expense after a period of time. Therefore the taxable income reduces and so does the tax you have to pay.

In any business the asset structure plays a pivotal role in the success of the business. Their asset structure is usually made up of Current assets, PPE, Investments, Non tangible Assets. Business follows the Asset Life Cycle management. Fixed assets usually undergo depreciation which lowers net income and these results in tax savings for the company.

Business use the ROA (Return on Assets) to identify how profitable a company is relative to its assets. ROA is shown as percentages. ROA takes into account a company’s debt. The simple formula for ROA is
ROA= Net Income÷Total Assets

The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

Several companies such as in transportation, machinery have a higher percentage of PPE while software, data companies have a much lower share of PPE. Some companies reduce asset base to improve ROA by leasing fixed assets. Moving from in house manufacturing to outsourcing reduces ROA.

Therefore the Long term assets play a pivotal role in the working of any company. A wrong asset can change the ROA ratio and put the company into trouble.

At the same time depreciation can help save tax. So several things go on simultaneously in a company where there are fixed assets. Regular maintenance, renovation sometimes even selling off assets is required. Companies also invest in non tangible assets so that in the near future if they are ever cash strapped, they can always bank on these assets.

Which Assets Can Be Depreciated?

Investing in long term assets is usually fruitful. From stocks, bonds, copyrights, patents to real estate all give good profit after a long period of time. However there is something called as depreciation that might eat into your envisioned profits. Therefore it’s wise to know more about depreciation.

The first question that comes to mind is what exactly depreciation is. Depreciation in accounting can mean two things – decrease in value of assets and allocation of the costs of a long term asset to an expense over the useful life of the asset.

The next query is which assets can be depreciated and which cannot. Assets such as buildings, equipment, machinery, computers, vehicles, furniture and fixtures among others can be depreciated. So antiques though quite expensive and a good investment do depreciate over time due to wear and tear. Non tangible assets too such as patents, copyrights and computer software too can be depreciated.

There are certain assets that do not depreciate and hence are quite profitable. Land is not a depreciable asset as it does not lose its value. Like land, gold too does not depreciate because it is believed to have an unlimited time span. But sometimes gold does depreciate due to the changes in the market. During recession the value of gold increases but when the market revives the demand for gold declines. Gold ornaments on the other hand depreciate quicker than pure gold because ornaments can be damaged, simple wear and tear can reduce the value of gold.

Properties that you use both personally and professionally can only be depreciated from the business perspective. Rented properties too undergo depreciation. Depreciation expense is the largest tax deduction available to real estate investors and can help investors improve their cash flow by reducing their tax liabilities. Every year you can reduce your taxable income without negatively impacting your cash flow.

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