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View Full Version : how creative do you get with depreciation??


MacLawnCo
04-27-2003, 01:57 AM
As i have been reviewing for my accounting final, some of the things have stuck in my head, one being the different methods of depreciation.

I realize that this is a personal preferance, but i was wondering what method you guys use for your business.

Option 1)
Straight line-
You buy an asset for $5000, has a useful life of 4 yrs, and a scrap value of $1000. That would make depreciation $1000 per year.

Option 2)
Double declining-
You buy an asset for $5000, has a useful life of 4 yrs, and a scrap value of $1000. That would make depreciation something lkie this: 1st year: $2500, 2nd year: $1250, 3rd year: $250, 4th year: $0 (Im not positive of the 3rd and 4th year ammounts)

Option 3)
Per unit-
You buy the asset for $5000, has a useable life of 2000 hours, and a scrap value of $1000. That would make depreciation at $2 per hour.

I think that per unit would be the best for our industry since we are reasonably sure of our equipment's life and we base most of our work on hourly costs and rates. With that being said, what do you all use and why?

KerryB
04-29-2003, 09:51 AM
You forgot one.lol What about section 179?
I think maybe you've got some studying to do before your final.

MacLawnCo
04-29-2003, 11:30 PM
Kerry,

Im glad that is over...lol. Im pleased to report that sect 179 wasnt on there. Would you care to elaborate on that? Did you see any flaws in my earlier descriptions also?

Meier
04-30-2003, 10:21 PM
I'd be willing to guess most folks let their accountant make that decision when the taxes are prepared. Just a hunch, but I'd also bet that most take the double declining method out of the three available choices.

Later,
DFW, TX

KerryB
05-01-2003, 09:09 AM
Under section 179 you can expense 100% of equipment purchases up to $25,000.00.
So if I bought $26,000.00 worth of equipment this year I can right off $25,000.00 under section 179 and choose another method for the other $1,000
00. for this year.
I am surprised you didn't learn about it in your accounting class.

Green in Idaho
05-01-2003, 12:58 PM
Kerry,

Mac just experienced financial accounting not tax accounting. Two different classes and that's probably why he didn't include Section 179.

As for Mac, since you are talking about financial accounting (book depreciation) many, if not most, small businesses do not get into the different types of depreciation and in fact usually do not even produce financial statements other than their annual tax return== mistake, but that's the norm.

In the event the owner does request or produce a financial statement, I think the usual is straight-line. Straight-line is easy and still effective. And most bankers are familiar with it to understand what's happening on the f/s.

Yes, the per-unit might be the most detailed but it would require hour meters on the equipment (available on big mowers but not much else). So it's not a very efficient method.

For tax purposes the standard is the MACRS system which is a deriviative of the double-declining balance.

Again, Mac you are talking about book and most people think in terms of tax.

Book vs. Tax accounting= two different critters.

Mark

MacLawnCo
05-01-2003, 06:18 PM
Mark, thanks for not holding a grudge.

Im really intrigued by all this numbers games that the business is presenting...so much in fact that i am seriously considering making accounting my major. :D

hoyboy
05-01-2003, 09:30 PM
I just use the MACRS (Modified accelerated cost recovery sytem) system for financial accounting as well. It's just as good as the others and then i don't have to worry about two sets of books. And like Mark said, it's only slightly modified from the double declining balance method. I can't remember what the exact difference is...I think it's something to do with the mid-quarter convention....but that was years ago when I actually cared what the difference was!

In general, any accelerated method is more realistic than straight line. You know, drive the new car around the block...etc.

Dan Norton
Hoy Landscaping, Inc.

Green in Idaho
05-02-2003, 12:28 AM
Originally posted by MacLawnCo
Mark, thanks for not holding a grudge.

Im really intrigued by all this numbers games that the business is presenting...so much in fact that i am seriously considering making accounting my major. :D



Mac, make one of your next classes Cost Accounting and you'll never want to go to one of those lame bone-head marketing classes again... For any business entrepreneur, accounting is truly the most beneficial study... IMO.

And throw in some horticulture classes too.

Mark

KerryB
05-02-2003, 08:23 AM
I gottcha now, thanks for reminding me. I forgot they were 2 seperate animals. But its been a few years since I finished my accounting degree.
Damn!!!!!! I am getting old. lol