Laurentide Finance Info

Depreciation, a very commonly used term in the field of finance and accounting, in the simplest terms is used to denote the spreading of the cost of any asset or equipment over a span of many years. With time the value of every asset falls due to variety of reasons and through depreciation that fall is calculated and represented. The fall in value can be attributed to numerous factors like usage, time passed, obsolete technology, wear and tear, rusting, decay and the like.

The calculation of depreciation also becomes important because it eventually helps in assessing salvage value which is nothing but the estimated value of the equipment after its useful life is complete. This makes calculating the depreciation for any equipment an important exercise. Though there are many ways to calculate the depreciation of the equipment, two most commonly used methods are;

• Straight-line Method

• Declining Balance Method

Both these methods are used quite extensively because they are effective and are useful in their own ways.

Straight-line Method:

This is one of the most commonly used methods of calculating depreciation. It is adopted when accumulated depreciation is to be found out. Accumulated depreciation is nothing but the cumulative depreciation of the equipment calculated up to a certain point in its life. To get the current accumulated depreciation for any point of time the depreciation for the previous period is simply added to the depreciation for that single period.

In the case of straight-line method the salvage value of the equipment at the end of that time span during which the revenues will be generated by using the equipment, is estimated. The savage value thus estimated may turn out to be zero or even negative. It thus gives an idea as to what the estimated value of the equipment would be at the time of disposing off the equipment.

It also shows the book value at any point of time as it is nothing but the difference between original cost of the equipment and its accumulated depreciation till that time.

Declining Balance Method:

It is a method used to calculate accelerated depreciation. The term accelerated depreciation comes into picture when higher deductions need to be made for the initial years of the total life span of an asset.

Declining balance method provides for higher depreciation charges for the very first year of the equipment’s life which subsequently falls with each passing year. It has become popular and useful as it gives a realistic idea about the actual benefits that are gained from using the equipment.

In this method the annual depreciation is calculated by multiplying the depreciation rate with the book value that the equipment had at the beginning of the year.

Both of these methods can be used for calculating the depreciation of the equipment over its useful life.

There are different types of loans methodologies or loan arrangements that can be adopted when it comes to buying business equipment. One of the popular and useful financing options is Chattel Mortgage.

Chattel Mortgage is basically a fixed-rate loan arrangement that is adopted when it comes to buying equipment. In this system the equipment belongs to the client and loan is secured by the financial services company for charge. Chattel Mortgage is found to be the most suitable option for the businesses which are run on ‘cash’ basis for GST.

There are many advantages with adopting Chattel Mortgage which have made it a popular option among the businesses. The equipment is owned by the owner throughout the total term of the agreement. The interest paid by the user as well as the depreciation on the equipment get the user tax benefits as well. Another benefit of the Chattel Mortgage is that it can also have a residual component. Moreover, you can put in a deposit of any amount or even a trade-in vehicle.

Also, if you are using the cash method of accounting the Chattel Mortgage finance lets you make GST claims upfront. This particular feature is in fact the high point of Chattel Mortgage finance arrangement. In case you also want to claim the GST component on the equipment you will buy all that is required is that you should be registered for GST and you should be using the cash method of accounting. The procedure of claiming the GST component is simple to understand and execute as well. The mechanism is that you can claim your GST component simply in your next BAS (Business Activity Statement) statement.

This unique feature of getting the option of claiming the GST component on purchase is not available on the CHP (Commercial Hire Purchase) contract.

Well, many of you may get surprised to read this heading and may be thinking that in the present recession era when the financial crisis is looming large over the entire world and every sector is bearing the brunt of economic slump, how machinery industry can have positive sales prospect. The reason for this smidgeon of optimism is the basic nature as well as the utility of machinery in our life. The machineries have been the biggest aid in the human progress and right from wheels to rocket science; it has been the machines that have helped in the human transition from barbarian to civilized or to today’s techno-civilized individuals. The reason for long term positive sales prospect lies in the nature of machinery. The machinery is seen as a key enabler of increasing productivity, cost containment and quality control. These utility of machinery would always be required for development and for more development more machinery would be required. So this will obviously increase the sales prospects of the machinery in the long run.

Even if we take historical factors in to consideration, machinery industry has always grown at a steady pace, however slump do come for brief periods but that has been for a very small phase. This fact could be substantiated by the example of great depression of 1929 when the machinery industry did see the slump but soon it recovered and during the Second World War it was on its boom. Even recently in 2001 when US economy was going through a bad phase US machinery industry did see the slump but soon the industry came back on track and showed positive growth. This pattern suggests us the fact that after current recession the machinery sector will have positive sales prospects. My view is even substantiated by chairman of Tractor and Machinery Association of Australia, Michael Armstrong who holds the opinion that long term outlook for the machinery industry is strong.

The other fact that indicates the same is growing population of the world. The rapid growth of population that the world is witnessing now will result in 50% rise in food demand by 2025 and it would be more than doubled by the year 2050. The increase in food demand obviously means more food production and that means more demand of machinery. All these factors ably describe the fact that although the machinery industry is witnessing the slump in the current recession era it will surely have a positive sales prospect in near future.