Accounting for Depreciation and Capital Improvements

Why Depreciation Matters

As you put together your financial projections for your entrepreneurial venture, you will need to calculate the depreciation for your start-up expenses as well capital purchases. Depreciation is important for two reasons: first, it’s a way to spread out the expense of an equipment purchase over several years and understand the true cost of running your business.

Second, it can be used as a budgeting tool. If you get into the habit of depreciating your equipment purchases, it’s a reminder to start saving for its replacement, because at some point you will need to replace your equipment. If you’re depreciating it and showing its value on the income statement as an expense, than you can tell what you need to be putting aside every year in a savings account to replace it.

Finally, adding a line-item for depreciation on your income statement lets you see the impact of the purchase as an operating expense over time.

How to Calculate Depreciation

Straight-line depreciation is a really straightforward calculation: just take the value of the equipment and other assets you intend to depreciate and divide it by the number of years you plan to use it. What gets tricky is when you’re making purchases over the course of your business. How do you depreciate multiple purchases over multiple years? For that, you can use our handy tool.

Need more help? We offer phone consultation with screen-share to coach you through the use of this template.