Effect Of Financial Factors On Your Business
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Depreciation is a factor that works better for businesses than it does in the case of individuals. When you hear about this term, you’d normally think about the value of your beloved car reduce over a period of time. This sure is painful. However, depreciation can actually be a helpful tax-saving measure when it comes to running a business organisation. It is important for an entrepreneur to learn how this factor works in order to take an advantage of the same. In simple terms, depreciation is typically a non-cash expense that tends to reduce the value of an asset over time. Though most of the times it is non-cash, there are also cases with cash depreciation. When it is stated that a concerned depreciation is non-cash, it implies that depreciation is considered as an accounting entry and the amount of cash in the business’s treasury is unaffected. Machinery, equipment, office furniture, technology and computers, buildings and improvements in buildings, leasehold improvements for rented properties and business vehicles are some of the most common assets which can be depreciated in a business organisation. Out of all the business assets, land is the only asset which doesn’t depreciate over time. On the other hand, the value of land has always been known to appreciate (increase) with time.
Every year in the life of an asset, a specific amount is included in the income tax return of the business as an expense. This would in turn reduce the taxable income of your business. For instance, if you have purchased office furniture for £20,000 and the furniture has a life of 10 years and £1000 worth of scrap value. Using the method of straight-line depreciation, £19,000 of the furniture’s cost should be divided over 10 years of its life. So, £1,900 worth of the value can be reduced on the tax return of your business for each of the concerned 10 years. It should also be noted that depreciation on an asset has no relevance to the way in which the asset was purchased by the company. Whether equipment is purchased with cash or by taking a loan, it has nothing to do with depreciation calculation, and the final value of the asset after depreciation will be the same. However, leasing a business asset may influence the ability of the organisation to calculate depreciation. It is your responsibility to be wise and choose which way to follow for which asset. You should also be smart enough to arrange for finances. Asset finance may seem to be a simple decision but it never really is. However, it is always suggested to approach a commercial bank for a long-term loan, and an alternative finance platform for short-term loan. These small decisions tend to make a huge difference in the way your business works.
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