A wide range of assets enables organizations to carry out activities smoothly and efficiently. Be it computers, vehicles, machinery, facilities, or any other. As assets exist in a company over time, they undergo audits every once or a few times a year. During this time, asset managers match what is available in the inventory with the records in the database. Another critical information auditing yields is fixed asset depreciation values.

The value of assets from the initial time of purchase declines over time. It is known as depreciation. And as the values change, so do the balance sheets of organizations. Several factors contribute to depreciation, including wear and tear, technological advancement, economic changes, and the passage of time. There is no asset that is invulnerable to depreciation.

So how important is calculating fixed asset depreciation? Very. In short, overlooking depreciation leads to numerous financial complications. In this article, we go into detail about why evaluating asset depreciation is crucial. Let’s get started.

An example of asset depreciation

Let’s discuss how depreciation works. Let’s say a company buys a physical server for $10,000 and wants to use it for a period of five years. Although the asset is fully paid for, the physical server’s value declines with time and usage. At the end of five years, the asset’s value can become zero. 

Depreciation is a non-cash entry. It impacts the balance sheet, which reveals the financial position of a company at any given time. One may ask about the necessity of knowing depreciation values, especially when it doesn’t have any hard cash value. We go over why. 

The purpose of evaluating fixed asset depreciation

We discuss the five main reasons calculating fixed asset depreciation is vital. Manual tools like spreadsheet software and paper-based tools are the common go-tos for calculating depreciation. However, they are not effective for use in the present day. Asset management software is a superior solution. That said, let’s dive into the five reasons for depreciation evaluation.

Financial position accuracy

Tracking and analyzing the depreciation values of assets provides undistorted information about a company’s financial standing. Especially when depreciation is steep, the profits and losses of an organization become uncertain and give investors an incorrect picture. 

Tax returns

Overlooking depreciation or errors in estimating cause companies to report profits higher than what it is. And when applying for tax, the returns are according to a company’s disclosure of its financial standing. Large discrepancies in report depreciation values attract legal repercussions. Calculating fixed asset depreciation avoids that.

Asset lifecycle management

Having healthy assets performing efficiently in the organization at any point in time is vital. That means companies need to dispose of and replace assets at the right time. Assets having high depreciation values may require disposal and replacement. And the only way to find that out is by calculating depreciation.

Transparency

Looking into the depreciation value of assets provides transparency. Poor visibility of this aspect of assets causes oversights that impede company performance. And in the worst-case scenario, it leads to losing investors and legal challenges.

Decision-making

Lastly, depreciation values help evaluate and execute crucial decisions. Say, for instance, an asset depreciates faster than expected. Tracking it in real-time allows asset managers to act on it quickly, slowing down the decline in asset value. 

How to slow down asset depreciation?

Organizations can exert some control over the speed of assets depreciating in the following ways:

• Asset upgrades – Improving existing assets in the organization by investing in upgrades increases asset value and curtails the rate of depreciation.

• Asset maintenance – Timely maintenance and repairs of assets lengthen lifespans and slow down depreciation rates. 

Conclusion

Calculating fixed asset depreciation is a critical task to ensure smooth business operations. Fixed asset management software is the most reliable solution for accurately estimating the rate of asset depreciations. If you’re looking to track the value of your assets from purchase to disposal, then get SmartAMS. It is our leading cloud-based, feature-rich asset management software. Reach out to us to learn more.