Introduction to Fixed Assets and Depreciation
Fixed assets are all those items, equipment, vehicles, buildings, and other tangibles that are purchased and used by an organization to generate profit. Fixed assets, or non-current assets, are long-term tangible items that are not sold or consumed during the operational life of a business. They are merely used as tools--allowing a business to carry out its daily operations.
The value of an asset depreciates as it is used over time. For instance, the wear and tear (from mileage, age, and condition) of a vehicle due to its use depreciates, or lessens, its value. Depreciation is the wear and tear associated with the use of an asset. The depreciation of fixed assets is the decrease in their purchase price, or value, due to their usage.
Depreciation is listed as an expense. It is a way the current value of a particular asset can be calculated based on its usage. This is important to businesses for various reasons: depreciation on fixed assets determines accurate profits made by an organization and shows its correct financial position at any given point in time. This allows businesses to determine their tax liabilities and enables them to make appropriate provisions for asset replacement.
According to Kathy Ivens and Leslie Capachietti in “QuickBooks 2010: The Official Guide," depreciation on assets is a journal entry activity and is typically calculated by organizations at the year's end.
Resource: Capachietti, Leslie. QuickBooks 2010: The official guide. McGraw-Hill Osborne Media, 2009. (Kathy Ivens is also listed in the author information.)
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