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BUSINESS ADVISOR
Capitalizing an ENT Scope
Purchase price
$47,000
Depreciation
$6,428 per year for 7 years
Revenue
$65,000
Profit margin
90%
lose value as we use
them and as time
moves on. Buildings
get old, equipment
breaks down, and computers and software become obsolete. The
IRS knows this, so you have to expense a part of the asset's value
for each year of its "useful life." This practice is known as "depreciation."
According to the manufacturer (not the vendor), our $47,000 laser
has a useful life of 7 years. At the end of that period, the microscope
would be worth, say, $2,000 for scrap metal. So we have to depreciate
$45,000 of the value of the microscope for 7 years. Under the most
common depreciation method, the company would claim a depreciation expense of $6,428 per year, reducing total profit by that amount.
Just to complicate it a bit, depreciation also has another role under
GAAP, called the "matching principle." This principle says that, when
companies report revenue, they must simultaneously report (as
expenses) all costs incurred in producing that revenue. Using the
microscope, the $6,428 in depreciation is an expense also incurred to
produce the revenue generated by the microscope that year — and it
must be accounted for in relation to microscope-related revenue.
The bottom line: capitalizing and depreciating
When you capitalize and depreciate, you win 3 ways.
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O U T PAT I E N T S U R G E R Y M A G A Z I N E O N L I N E | D E C E M B E R 2012
