One of the differences between book income and taxable income is depreciation. In general Section 168 of the Internal Revenue Code allows businesses to accelerate their depreciation for tax purposes. This increases the expenses of the business thus reducing profit for tax purposes.
Month: March 2017
When a small business purchases fixed assets two financially based opposing forces come into play. The first is the financial reporting desire to present information in a fair manner so management can make good financial decisions. The opposing force has to do with taxation. Here the business desires to report less profit to reduce the tax obligation.
Depreciation is the process of allocating the initial capital outlay for fixed asset purchases over time to the income statement. The basic principle with depreciation is that any fixed asset has a predetermined lifetime based on time, usage or fair market value. Therefore, a fair and equitable allocation of the initial purchase price is applied to each time period. Your job as the bookkeeper is to assign depreciation expense to the respective asset and record the entry as a function of daily operations.
Every now and then management authorizes the purchase of a long-term producing asset. This could be a vehicle, piece of equipment or real estate. These purchases are referred to as fixed assets. Recording of these entries is a little different and this lesson explains the entire recording process associated with fixed assets.
In small business, cash is almost always the number one issue. There is simply never enough. This is primarily attributable to growth. Growth requires both physical assets to produce more and expansion of accounts receivable. Technically, the expansion of accounts receivable is the economic equivalent of lending cash.