Simply put, depreciation allows businesses to reduce their taxable income without making the additional cash expenditure typical of most other expenses. While depreciation is an attractive way to reduce taxable income, specific regulations govern how it is to be calculated and allocated. Let's take a moment to review a few important points about how companies calculate depreciation. When analyzing income statements, it is very important to understand how different accounting methods for calculating depreciation affect the income statement. Sometimes the accounting methods selected can materially alter the net result of this important statement.
Most businesses have the right to choose amongst a number of different depreciation schedules.
Typically, businesses elect a depreciation schedule to suit their specific needs or preferences. In order to make comparisons of different companies, you will need to know the role that accounting plays in the final composition of their respective income statements. Read below to look at two of the most common methods. Using a straight-line depreciation schedule, businesses deduct the same amount of depreciation each year until the assets has been fully depreciated. However, straight-line depreciation is not the only method available.