How to write off assets on an income statement?
Say the equipment was invested at $1,000,000. If i have to write off the cost of the equipment this year because it has no salvage value. Will it be -1,000,000 on the income statement?
If the projected equipment depreciation was 150,000, will that be included in the income as well? or is it irrelevant since you're writing off the asset?
To write off an asset on an income statement, you need to understand the concept of depreciation. Depreciation is the process of allocating the cost of an asset over its useful life.
When an asset has no salvage value, it means that it is expected to have no residual value at the end of its useful life. In this case, the entire cost of the asset can be written off over its useful life.
1. Determine the useful life of the asset: This is the estimated time period over which the asset will be used by the business.
2. Calculate the annual depreciation expense: Divide the cost of the asset by its useful life. In your example, if the equipment cost is $1,000,000 and the useful life is 10 years, the annual depreciation expense would be $100,000 ($1,000,000 / 10).
3. Record the depreciation expense on the income statement: Each year, include the annual depreciation expense as an operating expense on the income statement. In your example, the annual depreciation expense of $100,000 would be deducted from revenue to calculate the net income.
So, to answer your specific questions:
- If the equipment was invested at $1,000,000 and has no salvage value, you would write off the cost of the equipment over its useful life. The asset would not be directly reflected as -$1,000,000 on the income statement. Instead, the annual depreciation expense of $100,000 would be deducted from revenue each year.
- The projected equipment depreciation of $150,000 is relevant, even if you are writing off the asset. However, it is important to note that depreciation expense and write-offs are not the same. Depreciation expense is the annual allocation of the cost of the asset, while a write-off refers to removing the cost of the asset entirely from the balance sheet due to impairment or obsolescence. In this case, the write-off would be equal to the remaining value of the asset after considering the annual depreciation expense.