Do You Know When to Depreciate or Expense Assets?

Many manufacturing facilities and distribution centers have depreciation schedules to track high-cost assets that are depreciated over a number of years. These assets usually fall under categories such as factory equipment, tow motors, vehicles, and industry-specific instruments. Other assets (often termed personal property) are less costly items that are expensed rather than depreciated. Many accountants today use a rule of thumb of $1,000 to determine whether the item is depreciated or considered an expense item. Look around any office, no matter what the industry; you will see tables, chairs, desks, lamps, file cabinets, computers, and printers – all of which are expensed rather than depreciated. An accountant explained that most computers are outdated within 18-24 months, so they can’t justify depreciating them.

Preventing Problems

Since these assets are not on a depreciation schedule, how do you keep track of them? Create an asset inventory. The information can easily be updated when new items are purchased, and old items discarded. Why should you go to the trouble of creating and maintaining this information? The most immediate reason is to know you are sufficiently insured. There are many business owners and managers who do not realize the total value of the company’s assets, due to the accumulation of new items over the years. Therefore, the insurance coverage has not been increased accordingly. This can result in a major financial issue when attempting to recover from a catastrophe.

Faster Recovery from Catastrophes

Once insured properly, your inventory documentation will help you maximize your insurance claim after a fire, theft, or natural disaster. By having this record up to date, you will be able to remember (and prove through photos) all the assets in the building, as well as prove the value of the items. This could make the difference between getting back to business quickly and taking months to compile the list before you’re able to file a sufficient insurance claim. The loss of time and money can severely harm your current and potential business.

Finding Items Is Easier

Another key reason to have this information is to know what you own. When listed by location, you’ll know where rarely used items, such as ladders, easels, folding tables, etc., are stored. This allows for quick retrieval without checking every closet or storage area. Another advantage is you can verify ownership before making a purchase, which will result in avoiding unnecessary expenses.

Better Financial Records

If you need to apply for a loan or line of credit, this up-to-date report can be presented to the bank to prove total asset value. Also, when buying or selling a business, it is essential to know the total value of the company, which includes personal property. Expensed assets will not have the high dollar value of the depreciated items. However, the need to record, track, and maintain a current personal property inventory is evident. If you do not have the time or manpower to create this important information, there are many asset inventory service companies that will complete a professional record for you.