Why are the costs of plant/long term assets recovered through depreciation vs. expensed out during the period purchased? Choose one of the following depreciation methods to discuss: straight line, units of production, declining balance. Share how depreciation using this method is calculated and provide an example of when this would be the most ideal method for application.

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Business

Toodles

27 May, 12:42

Why are the costs of plant/long term assets recovered through depreciation vs. expensed out during the period purchased? Choose one of the following depreciation methods to discuss: straight line, units of production, declining balance. Share how depreciation using this method is calculated and provide an example of when this would be the most ideal method for application.

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Roger Orozco · Answer 1

The advantage of expensing an asset is that you will pay less taxes during the current period. The "disadvantage" of expensing an asset is that your taxes will be higher in the future, which causes fluctuations in net income.

For example, if you expense an asset that costs $100,000 using Section 179 expensing, your income will decrease by $100,000 during this year. If you use straight line depreciation method, you could depreciate $20,000 during the current year and four more years in the future.

Depending on the company's expected sales and costs, they might decide to depreciate an asset instead of expensing it. By depreciating an asset you can have more stable incomes and that can be very beneficial for small companies that seek better financing conditions. It is normal that when banks analyze credit applications from businesses they will separate one time events from their comparative analysis of income statements and balance sheets.

Another reason why a company might choose to depreciate instead of expensing is that the IRS requires companies to have at least 3 years of profit every 5 years. If expensing results in a net loss, then it is not a good idea.