Depreciation

Depreciation is the process of allocating an asset purchase over its life expectancy. It is most commonly used to expense a prorated portion of an asset purchase such as heavy equipment, vehicles, buildings, and other large ticket items. These articles include GAAP and tax depreciation.

Railroad Companies – A Solid and Steady Investment

These six are behemoths when it comes to transportation. All have revenues greater than $2.5 Billion per year and hold at least $4 Billion in fixed assets. The key to this investment is the asset allocation model.  A common thread that binds all of them is that the asset side of the balance sheet is fixed assets intensive. Basically, more than 85% of the assets are fixed in nature. 

Due to this asset structure, there are some business principles every investor should understand because they are applicable to railroad investments. First and foremost is the fixed asset maintenance/upgrade relationship with depreciation expense (allocation of utility value). The next principle is referred to as the break-even point. In general, long life fixed asset driven entities have lower financial break-even points than a traditional company. A third and probably the most influential element of profit for a railroad company is the concept of marginal dollars adding a very high percentage of each marginal dollar of revenue to the profit. The following three sections explain these three principles in more detail related to how they are applied to railroad financials. The final section ties it altogether for the investor as to why railroad investments are a solid and steady investment. Future articles related to this series utilize these three principles when discussing/explaining the respective investment.

Bookkeeping – Estimates (Lesson 82)

Estimates

There are many transactions in accounting requiring the accountant to use estimates for the respective debits and credits. The following five lessons cover how estimating is performed with depreciation, payroll benefits, bad debts, warranties and extraordinary items. This lesson explains why estimating is needed and used in business.

Fixed Assets Turnover Rate

Fixed Assets Turnover Rate

The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio is only effective for business operations that are fixed asset intensive. With service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical.

Cash Flow From Operations – Basic Formula

n a pure cash only operation, the profit as reported on the income statement would also be cash flow from operations. But modern-day business is not pure in how it is conducted. Companies agree to pay suppliers at a later time, payroll is weekly or monthly, benefits that are paid in the future are offered to employees, credit is extended to customers; the list can go on and on.

Bookkeeping – Amortization (Lesson 53)

Amortization

Amortization is similar to depreciation whereby an asset’s cost is allocated to the expense over time. There are several differences with amortization. Amortization is used with intangible assets and the method is almost always straight line. As a bookkeeper it is your job to maintain the amortization schedules, report the information correctly and interpret the results for management.  

Bookkeeping – Introduction to Depreciation (Lesson 50)

Depreciation

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.