Boring stuff:
Depreciation is the benefit you receive over a given time period from the capital assets you purchased (tank, fermenter, canning line, etc) Unlike monthly recurring expenses (utilities, office salaries, supplies) capital assets are placed on the balance sheet rather than the profit and loss. The depreciation from these assets is what appear on the profit and loss statement. Capital assets are readily available and in use for 3, 5, 7, 15, or 40 years. Capital assets are important to monitor in a manufacturing setting given the size and price tag of the equipment.
Fun stuff:
The importance of tracking fixed assets are:
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The IRS requires it
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It makes it easier to track the movement of these assets. Examples: If you need to replace an asset, something gets damaged, you buy more equipment. All these scenarios require semi-complex calculations that would be a nightmare if the assets were not on the balance sheet.
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Capital assets help your balance sheet. Banks, rich uncles, and investors love a healthy balance sheets.
Depending on your financial performance for the year, you may be entitled to the fully depreciate the asset in the year of purchase. There are also other instances when tax planning determines you do not want the full benefit, because your slick CPA knows how to leverage tax credits rendering a near ZERO tax bill…..AND banking some depreciation for future years. BOOYA
As for what to depreciate and what to expense; I ask two questions:
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will it be around in 15 months
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does it cost over $1,000.
These are my general rules I apply most of the time, but I have depreciated brass fittings costing $26 that went into building the brewhouse. Capturing all the pieces allows for a true cost of the brew house.
Questioned Welcomed