What is a depreciating asset?

A depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles. Land and items of trading stock are specifically excluded from the definition of depreciating asset due to the fact that. Any improvements to the land are also considered depreciating, such as a windmill or a fence, and thus are not monitored with the land, even if they aren’t removable.
Most intangible assets are also excluded from the definition of depreciating asset. Only the following intangible assets are specifically included as depreciating assets:

• Certain items of intellectual property (patents, registered designs, copyrights and licenses of these)
• Mining, quarrying or prospecting rights and information
• Certain indefeasible rights to use an international telecommunications submarine cable system
• Spectrum licenses
• Data casting transmitter licenses.

The concept of depreciation is pretty simple. Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in your business, you can depreciate office furniture, office equipment, any buildings you own, and machinery you use to manufacture products.

To find the annual depreciation cost for your assets, you need to know the initial cost of the assets. You also need to determine how many years you think the assets will retain some value for your business. In the case of the truck, it may only have a useful life of ten years before it wears out and loses all value. Below are types of depreciating values.

Straight-line depreciation

Straight-line depreciation is considered the most common method of depreciating assets. To compute the amount of annual depreciation expense using the straight-line method requires two numbers: the initial cost of the asset and its estimated useful life. For example, you purchase a truck for $20,000 and expect it to have use in your business for ten years. Using the straight-line method for determining depreciation, you would divide the initial cost of the truck by its useful life.

The $20,000 becomes a depreciation expense that is reported on your income statement under operation expenses at the end of each year.

For tax purposes, some accountants prefer to use other methods of accelerating depreciation in order to record larger amounts of depreciation in the early years of the asset to reduce tax bills as soon as possible.

You need, additionally, to check the regulations published by the federal Internal Revenue Service and various state revenue authorities for any specific rules regarding depreciation and methods of calculating depreciation for various types of assets.

Physical Depreciation

Physical depreciation represents the accumulated loss in market value caused by physical wear and tear since the date the building was completed. Physical curable depreciation refers to damage that can be corrected economically, and it includes such items as poor decorative conditions, broken fittings, outdated or worn out carpeting, faded or old paint, appliances not in a proper working order as well as aging roofs. On the other hand, physical incurable depreciation includes wear and tear of structural members and foundations where repair or replacement is likely to involve significant cost.

These two kinds of depreciation are treated differently. The dollar amount of the deduction required for physical curable depreciation is generally based on the required cost of carrying out the repairs. Conversely, the allowance for physical incurable depreciation is more difficult to estimate, with the principal cause of such difficulty lying in the determination of the remaining life of the building.

There is no precise way to estimate the cost of correcting physical incurable depreciation. The cost of this kind of corrections is so great that in terms of economics the structure should either be left in its present state or totally rebuilt.

Governments tend to estimate the economic life of buildings in terms of straight-line depreciation, but this is so merely because it makes the estimate of capital gains and losses, as well as their recapture, a little easier to determine from an accounting point of view. Appraisers and experienced Realtors, on the other hand, will tend to make an educated guess more often than not as to the value of the physical incurable depreciation based upon visual observation while economists will base it upon knowledge of regional comparable market data.

Functional Depreciation

This type of depreciation describes the loss of value caused by outmoded or inadequate design. Here too it is necessary to distinguish between curable and incurable functional depreciation. Functional curable depreciation includes items such as the cost of replacing old-fashioned fittings, installing an additional bathroom or otherwise altering the existing plan by, for example, creating new doorways and blocking old ones, or by following market trends such as enhancing the visual appearance of rooms with open layouts and light-play. Again, the amount by which market value is reduced is in direct function of the cost involved in carrying out the necessary updates.

Moreover, like before, the amount by which market value is reduced because of functional incurable depreciation is entirely a matter of judgment and cannot be determined with an arithmetical calculation. There are, of course, limits to what can be done to cure functional depreciation. For example, if an architectural style has gone out of fashion, nothing can be done and a higher factor of deduction will be applied. The opposite is true, of course, of plans that never go out of style. For instance, residential ranchers are always high on the list of demand and very much sought after by elderly and younger couples alike but for opposing reasons: a lack of stairways for the first and easy maintenance for the latter.

Overall, buying depreciating assets on credit is a highly negative thing. To buy something that has a value that degrades over time would be a poor choice to add to your credit as if you needed to sell it to regain the money to pay off the amount, then you will be caught in a perpetual losing battle with debt.

Good Debt Vs Bad Debt

There are two different categories of debt you can accumulate, Personal Debt and Investment Debt. Personal debt, often called “bad debt”, results from the purchase of an asset that will likely depreciate over time. This includes borrowing for such items as a new car, clothes, or furniture. With personal debt, it is important to note why you have it in the first place and to what degree it is necessary. Financing a car because it gets you to work or school may be an acceptable form of personal debt. Purchasing a new car on a whim is not. Each situation should be considered and analyzed in accordance to its situation.

Investment debt, often called “good debt”, results from the purchase of an asset that will likely appreciate over time. This includes borrowing for an education, the purchase of a new home, or starting a business. The tax deduction on mortgage interest makes investment debt one of the more acceptable types of debt.

Debt Payments

When it comes to making debt payments, some debts are more essential than others are. There are Essential debts to pay, that must be paid, to avoid court and legal actions, as well as maintain good credit, while Nonessential debts, while still affecting your credit if not paid, do not affect it nearly as much. Below, there is a table dividing the Essential and nonessential debts into an easy to understand chart.

Your financial situation must not be plagued with high personal debt. What determines that is your ability to understand the different types of debt and priorities of debt payments. They are important factors in determining your success. Below, there are examples for each type of debt, as well as suggested methods of taking care of these debts.

Non-priority Debts

Credit debts are classed as non-priority debts. This means the action that creditors can take against you to recover their money is usually less severe than for priority debts. For instance, you do not usually lose your home or risk imprisonment if you cannot pay back a credit debt. However, some non-priority creditors may take court action against you and, if you are a homeowner, this could result in a charge being put on your home. Types of credit debt include bank loans, credit cards, overdrafts, store cards, catalogues; other debts to banks, conditional sale agreements, interest free credit, bill of sale, debts to pawnbrokers, debts to individuals below are a few suggestions on what actions you can take if your credit debt is out of control.

Make a deal-Most creditors will accept a low repayment offer if it is all you can afford. Many times, monthly payments may even be lowered or dismissed. Ask for any interest to be frozen on your account and any administration charges to be waived. If this is the only way to pay off your debt properly, many creditors will understand and be sympathetic.

Make Some Changes-Consider changing your account if your bank is taking money from your current account to repay a debt such as a credit card. Also, make changes in the way you use your credit cards. Do not increase the debt that you have on them by continually using them.

Priority Debts

These types of debts are ones that will need to pay quickly or you may lose something or will be to your future disadvantage. Debts such as Mortgage or car payments or student loans all fall into this category. When trying to resolve these issues, most times, contact with the creditors is the best option for resolving your financing issues and reaching an acceptable medium between you and your creditor. Below are some words of advice on contacting your creditors.

Answer your phone - Don’t ignore letters or phone calls from your priority creditors. Get in touch with them as early as possible and explain to them why you are in debt. If you call them over the telephone, you should follow up the call with a letter, confirming what you said on the phone. Keep copies of any letters you write to them. An advice agency such as your local Citizens Advice Bureau can help you write to your creditors. If you have poor writing skills, or are unsure of proper terminology or correct structure, these facilities can be of paramount usefulness.

Holding Letters -- If your priority creditors are threatening to take court action or have started to take court action against you and you need a little time to sort out your finances, send them a holding letter explaining your problems. Say that you will contact them again within two or three weeks. Ask them not to take any further action during this time. For more about negotiating with your creditors, see under heading Negotiating with creditors.

Make Payment Arrangements - Once you have paid off your mandatory expenses, (Food, clothing, etc.) contact each of your priority creditors and arrange to pay back what you what you owe. If you cannot pay back all of the debt at once, arrange payment plans satisfactory to both sides.

For example, you may be able to pay an extra bit each month until the debts are cleared. Another possibility is that you may not have any extra money now, but know you will have a lump sum in four months’ that will clear the debt completely. When it comes to these payment plan types, creditors are typically very understanding, helpful, and accommodating.

When you just can’t pay

If you cannot afford to pay anything to your priority creditors and your situation is not likely to get better, the outcome may be very serious. Examples of this could be being laid off on a job, or have received an injury preventing you from working. Get advice straight away. There are several agencies that specialize in these situations, and they may be able to help before your only choice is to file for bankruptcy.