In: Accounting
You own a business, and you have several capital assets that need to be depreciated. Using your knowledge of depreciation methods, decide which method to use for 1) book purposes (to record in the financial statements) and 2) for tax purposes (to claim on your tax return). Businesses use different depreciation methods for tax and book all the time. Justify your reasoning.
You own a business, and you have several capital assets that need to be depreciated. Using your knowledge of depreciation methods, decide which method to use for 1) book purposes (to record in the financial statements) and 2) for tax purposes (to claim on your tax return). Businesses use different depreciation methods for tax and book all the time. Justify your reasoning.
Depreciation:
Depreciation is used for Matching the actual the expenses incurred during the period with its income in the same period or accounting period
Suppose if I purchased a capital asset which may be a printer which may work minimum 4 years and its cost may be $5000.
Once we incur the cost for purchase of machine which may lead to immediate cash outlay but it is not lapsed working or worn out in the same year. it will come over the period of 4 years so we need to recognise the equal expenditure incurred over the period of time so here we need to expense $5000/4years=$1250.so that it is fulfil the concept of matching concept i.e match the actual relevant expenses with the revenue of same accounting period.
AS per The Books of Accounts Purpose;
We need to show the profits more in any accounting period so we need to show less Expenditure .
Depreciation is an expense item so we need to show very less cost over a period of life of machine. And thereby show the asset in the books of accounts which shows value in the assets in the long run of business.
So here we need to use straight line Method depreciation
Note: Depreciation methods is used is recognised by the law in the universe so that the financial statements should comparable. The essence is we should use our own method of depreciation, It should be a recognised method of depreciation.
As per Income Tax Purpose:
We need to show expenses more so that we can decrease the payment of income taxes
Here we follow Double Declining Balance method.
Every business man wants to decrease the expenses and Increase the profit so here we need to decrease the tax expenses irrespective of carry forward of taxes to next years.so Claiming depreciation more and As per the accounting purposes we need to show less expenditure so we shows very less amount of depreciation .However while preparing financial statements for tax returns purposes ,They have some predetermined rates which need to comply and follow such rates of Depreciation which is predetermined with respect to asset by the Department while filling the tax Returns.