As a business owner in Canada, you need to understand fixed assets and depreciation. Fixed assets refer to long-term assets that your business uses to generate income, such as equipment, buildings, and vehicles. Depreciation, on the other hand, is the decrease in the value of these assets over time due to wear and tear or obsolescence.

Understanding fixed assets and depreciation is important for several reasons. It can help you with financial reporting, tax planning, and budgeting. Here’s everything you need to know.

Fixed Assets

Fixed assets are also known as property, plant, and equipment (PP&E). These are assets that your business owns and uses for a long time to generate income. Some examples of fixed assets include:

• Buildings and land
• Equipment and machinery
• Vehicles
• Furniture and fixtures

Fixed assets are different from current assets, which are assets that your business expects to convert into cash within a year. Examples of current assets include inventory, accounts receivable, and cash.

Depreciation

Depreciation is the decrease in value of your fixed assets over time. This decrease in value reflects the wear and tear, obsolescence, or other factors that reduce the asset’s usefulness. For accounting purposes, depreciation is spread out over the useful life of the asset.

Depreciation is important because it can affect your financial statements, taxes, and budgeting. By accounting for depreciation, you can show the true value of your assets on your financial statements. Additionally, depreciation can help you with tax planning by reducing your taxable income.

Methods of Depreciation

There are several methods of depreciation that businesses in Canada can use. The most common methods include:

• Straight-line depreciation: This is the simplest method of depreciation, where the asset’s value is depreciated by an equal amount each year over the useful life of the asset.
• Declining balance depreciation: This method involves depreciating the asset by a fixed percentage each year, with the depreciation expense decreasing over time.
• Double declining balance depreciation: This method involves depreciating the asset by a fixed percentage each year, with the depreciation expense staying the same each year.

Choosing the right method of depreciation for your business depends on several factors, such as the asset’s useful life and the method’s effect on your financial statements and taxes.

Conclusion

Fixed assets and depreciation are important concepts for Canadian business owners to understand. Fixed assets are long-term assets that your business uses to generate income, while depreciation is the decrease in value of these assets over time. By understanding these concepts, you can make better financial decisions, plan for taxes, and budget more effectively.