Where’s Your Depreciation?
What’s your depreciation? This is a question I frequently ask companies when we start working together on financials. Too many times, I’m told that this is a year-end adjustment handled by the accountants.
Depreciation is one of, if not the largest, vehicle expense for a company. So, it’s very important to record this every month. You wouldn’t go a whole year without recording your fuel expense or any other expense representing roughly 3-5 percent of your income, so why is it accepted to ignore depreciation?
The main reason I hear for not recording depreciation monthly is that the accountant will do it at the end of the year. This is what the company’s outside CPA has recommended. This is because CPAs get the books closed and ready for taxes on a yearly basis. They don’t have a vested interest in your operating profit and loss statement that you’re using to make decisions for your company.
This isn’t to say that recording the depreciation at the end of the year will produce bad financials, they will be correct for the year. The problem is you won’t have accurate numbers for 11 months out of the year and when the entry is made it’s going to skew the month it’s entered as well.
Recording your depreciation expense is simple. The best and most accurate way of doing this would be record each asset at the time of purchase, set up depreciation schedules and record it monthly over the life of the asset. Once the asset is sold or retired, an entry is made that month to reflect the gain/loss and to remove the asset from the balance sheet.
I like to recommend that companies set up their schedules using the straight-line method to keep it simple. This is the best way of handling your depreciation, but isn’t practical for a lot of companies, especially the smaller ones. This approach requires someone to track the asset, book it at the time of purchase, decide on the useful life, determine the depreciation method to use, and record the entry each month.
The good news is there’s another simple way to enter depreciation that’s fairly accurate. You could talk to your accountant and have them provide you with the depreciation schedule for the year. You could enter that depreciation entry as part of your month end close process. At the end of the year, your accountant will create an entry to “true up” the numbers for any additions or retirements from your assets. There will be a small adjusting entry, so this method isn’t 100 percent accurate, but it will get your company a lot closer throughout the year than not recording anything until year end.
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There are a few different types of accelerated depreciation available which could alter the amounts. This is designed to be a quick and easy entry to get something recorded for your depreciation expense each month.
Publication date: 2/26/2018
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