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.