When you buy paper for your office printer, you can write the entire expense off against this year's taxes. Why? Because the paper doesn't cost that much, and you'll use it all up fairly quickly -- probably all within a year. But when you buy a camera or another piece of big equipment, you'll be using that for several years to come. So instead of writing it all off against this year's taxes, you write it off gradually, over the life of the camera. That's depreciation in practical terms.
Another way of putting it is in accounting terms: When your business buys a camera, that camera is an asset. But the camera is worth less every year because of wear and tear and because of newer, better cameras coming out. So depreciation is the decrease in the value of an asset over the span of its useful life.
Here’s how to track depreciation in Wave.
As an example, let’s say the camera costs $5,000 and it depreciates $500 per year (i.e., it will take 10 years to fully depreciate, suggesting the camera has a life of 10 years)
1. First, you want to categorize the purchase of the camera into an Asset Account. However, the account is not set up by default, so you must make your own. Go to your Accounting page.
2. Click on Add an Account on the far right side of the page.
3. You need to create either one of the following two options, for starters:
a. Machinery, equipment, furniture & fixtures (this account allows you to lump all depreciated items together; for example, your new camera as well as your printer and your scanner could all go in here together).
or b. Other Long Term Assets (this allows you to rename and customize the account for individual items; for example, you could create an account just for your camera).
For this example below, we chose Other Long Term Assets and renamed it Other Long Term Assets: Camera
You'll also need to create:
c. Accumulated Amortization of Machinery, Equipment, Furniture & Fixtures (this allows you to track your depreciation expenses in Journal Transactions, which we will use later on).
You'll find all these accounts under Asset > Fixed Asset > Long-Term Assets.
4. Go to the Transactions page, click on Add Expense, enter the description and amount, then choose the “Other Long Term Assets: Camera” category.
5. Now you want to depreciate the expense for each year. To do this, we’ll use the Journal Transactions option. Go to Accounting on the left side of your screen, then Journal Transactions.
6. Click Add Transactions.
7. Since the entire amount is currently categorized as an asset, our goal is to reduce the asset's net value each year (net value = value - accumulated amortization).
Different jurisdictions dictate how much you can depreciate each year, so you'll have to ask a pro, or your local tax authority, for that percentage.
To record the journal transaction, follow the example in the image below.
Enter the amount lost for the year in a row for Depreciation Expense. Under the Debit column, type the amount that has been depreciated.
On the next row, we choose the Accumulated Amortization of Machinery, Equipment, Furniture & Fixtures account, and under the Credit column, we record $500. Both sides should equal, indicated by the Total values.
8. And you're done! Since the item depreciates each year, you must create a new Journal Entry like this each year until you have depreciated all of it.
Wave is 100% free accounting software for photographers, freelancers and other small businesses.