Depreciation refers to the accounting practice dealing with assets as they get older and decrease in value. The Canada Revenue Agency (CRA) lets your business claim a tax deduction based on the decreasing value of equipment over time.
Imagine you spend $10,000 on equipment for your business, and you anticipate the equipment should last five years. Rather than recording the entire expense in your accounting records right away, you decide to record a $2,000 equipment expense annually for the next five years as the equipment depreciates. Think of the value of the equipment as the cash value you would get if you sold it used. This accounting strategy gives you a more accurate representation of your annual profits and expenses.
In contrast, if you write off the entire purchase the first year, that artificially lowers your profit that particular year. You would end up inflating your profits in subsequent years because you don’t include the value of that equipment as an asset.
You can depreciate assets based on their useful life. Alternatively, you can depreciate assets based on their current sales value. If you purchase a $10,000 piece of equipment and its resale value is $7,000 the second year, you write off $3,000 for the first year of ownership and continue this pattern until you fully record the expense on your balance sheet.
The CRA organizes depreciable business assets into classes. Each class determines the portion of the expense you can write off each year. For example, buildings in class 1 have a depreciation rate of 4% per year, while computer hardware in class 10 has a depreciation rate of 30% per year. To simplify the accounting process in your business software, you may want to use the same depreciation rates as the CRA.
QuickBooks Online uses handy software that lets you track expenses over several years to give you a better picture of your overall business health. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.