Recently I caught up with my brother, also a business owner where he expressed confusion on how to account for depreciation and instant write offs.
In my line of work this can be something confusing to the business owner as there are so many parts to a business; Owners Equity, Liabilities, Assets, Expenses, Income and so on, but what is what?
When purchasing something like machinery or a computer you may be tempted to account for this as an Expense, however these are Assets of your business and the depreciation is the reduction in the value of an asset over time. This depreciation over time is charged as the Expense as it can be matched against the Income generated in the same accounting period.
When accounting for depreciation select your method – While there are various methods the main ones are: Straight-Line (prime cost) and Diminishing Balance.
For the purpose of this blog we will select the Straight-Line method:
You purchased Business Machinery for $25,000 with a useful life of 8 years and no salvage value
$25,000 / 8 = $3,125 Depreciation Expense Per Year
To enter this into your accounting software each year you would complete the following:
When the asset is retired you would complete a new entry to write off the asset from your books:
Instant Write Off
The ATO has stated that using simplified depreciation rules, assets costing less than the instant write off threshold of $20,000 are written off in the same year they are used/bought regardless if the asset is purchased new or second hand.
How you account for this in your books is the same as the write off above.
For instance, you bought a new computer for your business for $3,000, which qualifies for the instant write off.
To account for the purchase and the depreciation write off you would do the following:
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