Long do you depreciate computer software

Even a non-physical, or intangible asset, can lose value over time—a brand may become less popular with younger consumers, or a proprietary technology may lose value as emerging tech takes its place.

As such, companies need to reflect this reality in their financials, and so they depreciate the asset on the balance sheet over time. This reduces its value on the balance sheet as years goes on. Remember all accounting must reconcile, and so changes in the balance sheet need to be reflected in other financial statements.

To reconcile this particular loss in value, the company takes a depreciation expense on its income statement. Say that a company wanted to expand its bubble gum producing capabilities for its wildly popular new branded gum.

The company actually did earn a profit this year, and even though they are sacrificing the benefits of those profits now say, with a dividend to grow the business with their large asset purchase, they were still profitable. To determine whether a cash outlay is charged as an expense to the income statement or as an investment in a long term asset that carries a depreciation expense over time, management needs to estimate whether that cash outlay will likely result in steady cash flows for the long term or has more impact in the current year.

I often hear the argument that early stage growth companies are unprofitable because they are reinvesting everything back into the business. Tax Myths—Busted! No matter how you file, Block has your back. File with a tax pro File online.

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