Bookkeeping Articles

Cheat Sheet / Updated 09-05-2023

To stay organized and on top of your nonprofit’s bookkeeping and accounting responsibilities, timely complete accounting tasks need to be done daily, weekly, quarterly, and yearly. Keep necessary financial information up to date so you’re prepared to submit paperwork to your independent certified public accountant (CPA), the government, and all stakeholders, both within and outside your nonprofit organization. To ensure your nonprofit’s activities are completed, organize a to-do list, prioritizing the tasks so the important ones are done first, and other jobs are scheduled around them. Managing your nonprofit means sticking to your plan to stay organized and run efficiently. Apply these guidelines to your nonprofit’s weekly plan: Set up daily priorities. Knowing what you need to accomplish each day allows you to take care of the most pressing matters. Surround yourself with professional staff. Surrounding yourself with professionals eliminates the pettiness of daily office drama! Professionals are self-motivated and focused on doing their jobs, and they require minimum supervision. Keep your goals before you. To maintain a clear vision, keep your eyes on the prize. Post your vision or your goals in a place where they’re visible to you every day. Manage your time by planning and scheduling your daily activities. Be mindful of distractions that pull you away from completing your tasks. Stay out of politics. Avoiding politics at work protects your nonprofit’s status.

Cheat Sheet / Updated 04-17-2023

There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get your head around the trickier bits of keeping the books and to know the process in order to better check and control those incomings and outgoings.

Cheat Sheet / Updated 04-07-2022

A great bookkeeper cares that the financial statements make sense and gets upset when something doesn’t balance or stuff goes missing. They also feel responsible when it comes to getting customers to pay on time. A good bookkeeper, in other words, is worth their weight in gold. This Cheat Sheet summarizes what you need to know to be an excellent bookkeeper.

Cheat Sheet / Updated 02-25-2022

Bookkeepers take care of all the financial data for businesses. Accurate and complete financial bookkeeping is crucial to any business’s decision makers: owner, outside investors, creditors, bank and even its employees. Keeping a close eye on your day-to-day business operations can help you be a Canadian small-business success story.

Cheat Sheet / Updated 02-25-2022

The title of bookkeeper brings up mental images of a quiet, shy individual who spends countless hours poring over columns of numbers. In reality, the job of a bookkeeper is of vital importance to any business that needs to account for its assets, liabilities, and equity. From the company founders to the investors to the IRS, the bookkeeper must be able to report the financial status by way of balance sheets and income statements and keep an organized and detailed paper trail of every financial transaction. This Cheat Sheet also describes the types of business structures with which bookkeepers must be familiar: sole proprietorships, partnerships, and limited liability companies.

Cheat Sheet / Updated 02-15-2022

Bookkeepers manage all the financial data for small companies. Accurate and complete financial bookkeeping is crucial to any business owner, as all of a company's functions depend on the bookkeeper’s accurate recording of financial transactions. Bookkeepers are generally entrusted with keeping the Chart of Accounts, the General Ledger, and the company journals, which give details about all financial transactions.

Article / Updated 03-17-2021

You’re probably not interested in just breaking even. You want to make money in your business. But knowing what quantities you need to sell just to cover your expenses is often super-helpful. If you own a one-person accounting firm (or some other service business), for example, how many hours do you need to work to pay your expenses and perhaps pay yourself a small salary? Or, if you’re a retailer of, say, toys, how many toys do you need to sell to pay your overhead, rent, and sales clerks? You see my point, right? Knowing how much revenue you need to generate just to stay in the game is essential. Knowing your break-even point enables you to establish a benchmark for your performance. (Any time you don’t break even, you have a serious problem that you need to resolve quickly to stay in business.) And considering break-even points is invaluable when you think about launching new businesses or new ventures. As you ponder any new opportunity and its potential income and expenses, you need to know how much income you need to generate just to pay those expenses. To calculate a break-even point, you need to know three pieces of information: your fixed costs (the expenses you have to pay regardless of the business’s revenue or income), the revenue that you generate for each sale, and the variable costs that you incur in each sale. (These variable costs, which also are called direct expenses, aren’t the same thing as the fixed costs.) Here are some tips to help figure out revenue per sale, variable costs, and fixed costs: Whatever you sell — be it thingamajigs, corporate jets, or hours of consulting services — has a price. That price is your revenue per item input — for example, $100 per hour for consulting. Most of the time, what you sell has a cost. If you buy and resell thingamajigs, those thingamajigs cost you some amount of money. The total of your thingamajigs’ costs varies depending on how many thingamajigs you buy and sell, which is why these costs are referred to as variable costs. A couple of examples of variable costs include hourly (or contract) labor and shipping. Sometimes, however, the variable cost per item is zero. (If you’re a consultant, for example, you sell hours of your time, but you may not pay an hourly cost just because you consult for an hour.) Your fixed costs are all those costs that you pay regardless of whether you sell your product or service. If you have to pay an employee a salary regardless of whether you sell anything, that salary is a fixed cost. Your rent is probably a fixed cost. Things like insurance and legal and accounting expenses are probably fixed costs, too, because they don’t vary with fluctuations in your revenue. Fixed costs may change a bit from year to year or bounce around a bit during a year, so maybe fixed isn’t a very good adjective. People use the term fixed costs, however, to differentiate these costs from variable costs, which are those costs that do vary with the number of goods you sell. Take the book-writing business as an example. Suppose that as you read this book, you think, “Man, that guy is having too much fun. Writing about accounting programs, working day in and day out with buggy beta software — yeah, that would be the life.” So, you start writing books. Further, suppose that for every book you write, you think that you can make $5,000, but you’ll probably end up paying about $1,000 per book for such things as long-distance telephone charges, overnight-courier charges, and extra hardware and software. Also suppose that you need to pay yourself a salary of $20,000 per year. (In this scenario, your salary is your only fixed cost because you plan to write at home at a small desk in your bedroom.) The following table shows how the situation breaks down. Costs and Revenue Description Amount Explanation Revenue $5,000 What you can squeeze out of the publisher Variable costs $1,000 All the little things that add up Fixed costs $20,000 Someplace to live and food to eat With these three bits of data, you can easily calculate how many books you need to write to break even. Here’s the formula: Fixed Costs / (Revenue – Variable Costs) If you plug in the writing-business example data, the formula looks like this: Work through the math, and you get 5. So, you need to write (and get paid for) five books per year to pay the $1,000-per-book variable costs and your $20,000 salary. Just to prove that this formula really works, this table shows how things look if you write five books. The Break-Even Point Description Amount Explanation Revenue $25,000 Five books at $5,000 each Variable costs ($5,000) Five books at $1,000 each Fixed costs ($20,000) A little food money, a little rent money, a little beer money Profits $0 The costs subtracted from the revenue (nothing left) Accountants use parentheses to show negative numbers. That’s why the $5,000 and the $20,000 in the table are in parentheses. But back to the game. To break even in a book-writing business like the one that I describe here, you need to write and sell five books per year. If you don’t think that you can write and sell five books in a year, getting into the book-writing business makes no sense. Your business is probably more complicated than book writing, but the same formula and logic for calculating your break-even point apply. You need just three pieces of information: the revenue that you receive from the sale of a single item, the variable costs of selling (and possibly making) the item, and the fixed costs that you pay just to be in business. QuickBooks doesn’t collect or present information in a way that enables you to easily pull the revenue per item and variable costs per item off some report. Neither does it provide a fixed-costs total on some report. If you understand the logic of the preceding discussion, however, you can easily massage the QuickBooks data to get the information you need.

Article / Updated 11-21-2019

External financial statements, including the income statement (also called the profit report) comply with well-established rules and conventions. By contrast, the format and content of internal accounting reports to managers are wide open. If you could sneak a peek at the internal financial reports of several businesses, you’d be probably surprised by the diversity among the businesses. All businesses include sales revenue and expenses in their internal profit-and-loss (P&L) reports. Beyond this broad comment, it’s difficult to generalize about the specific format and level of detail that bookkeepers need to include in P&L reports, particularly regarding how operating expenses are reported. Designing internal profit (P&L) reports Profit performance reports prepared for a business’s managers typically are called P&L reports. These reports should be prepared as frequently as managers need them, usually monthly or quarterly — or perhaps weekly or daily in some businesses. A P&L report is prepared for the manager who’s in charge of each profit center; these confidential profit reports don’t circulate outside the business. (The P&L contains sensitive information that competitors would love to get hold of.) Accountants aren’t in the habit of preparing brief, summary-level profit reports. Accountants tend to err on the side of providing too much detailed data and information. Their mantra is to give managers more information, even if the information isn’t asked for. Managers are busy people, and they don’t have spare time to waste, whether for reading long, rambling emails or multiple-page profit reports with too much detail. Profit reports should be compact for a quick read. If a manager wants more backup detail, she can request it as time permits. Ideally, the accountant should prepare a profit main page that fits on one computer screen, although this report may be a smidgen too small as a practical matter. In any case, keep it brief. Businesses that sell products deduct the cost of goods sold expense from sales revenue and then report gross margin (alternatively called gross profit) both in their externally reported income statements and in their internal P&L reports to managers. Internal P&L reports, however, provide a lot more detail about sources of sales and the components of the cost-of-goods-sold expense. Businesses that sell products manufactured by other businesses generally fall into one of two types: retailers that sell products to final consumers and wholesalers (distributors) that sell to retailers. The following discussion applies to both types. There’s a need for short, to-the-point or quick-and-dirty profit models that managers can use for decision-making analysis and profit-strategy plotting. Short means one page or less (such as one computer screen) with which the manager can interact and test the critical factors that drive profit. If the sales price were decreased 5 percent to gain 10 percent more sales volume, for example, what would happen to profit? Managers of profit centers need a tool that lets them answer such questions quickly. Reporting operating expenses Below the gross margin line in an internal P&L statement, reporting practices vary from company to company. No standard pattern exists. One question looms large: How should the operating expenses of a profit center be presented in its P&L report? There’s no authoritative answer to this question. Different businesses report their operating expenses differently in their internal P&L statements. One basic choice for reporting operating expenses is between the object-of-expenditure basis and the cost-behavior basis. Reporting operating expenses on the object-of-expenditure basis By far the most common way to present operating expenses in a profit center’s P&L report is to list them according to the object-of-expenditure basis. This basis classifies expenses according to what is purchased (the object of the expenditure), such as salaries and wages, commissions paid to salespeople, rent, depreciation, shipping costs, real estate taxes, advertising, insurance, utilities, office supplies, and telephone costs. To use this basis, a business has to record its operating expenses in such a way that these costs can be traced to each of its various profit centers. The salaries of people who work in a particular profit center, for example, are recorded as belonging to that profit center. The object-of-expenditure basis for reporting operating costs to managers of profit centers is practical. This information is useful for management control because, generally speaking, controlling costs focuses on the particular items being bought by the business. A profit center manager analyzes wages and salary expense to decide whether additional or fewer personnel are needed relative to current and forecast sales levels. A manager can examine the fire insurance expense relative to the types of assets being insured and their risks of fire losses. For cost control purposes, the object-of-expenditure basis works well, but there’s a downside. This method of reporting operating costs to profit center managers obscures the all-important factor in making a profit: margin. Managers absolutely need to know margin. Separating operating expenses further on a cost-behavior basis The first and usually largest variable expense of making sales is the cost-of-goods-sold expense (for companies that sell products). In addition to cost of goods sold (an obvious variable expense), businesses have other expenses that depend on the volume of sales (quantities sold) or the dollar amount of sales (sales revenue). Virtually all businesses have fixed expenses that aren’t sensitive to sales activity, at least in the short run. Therefore, it makes sense to take operating expenses classified according to the object-of-expenditure basis and further classify each expense as variable or fixed. Each expense would have a variable or fixed tag. The principal advantage of separating operating expenses into variable and fixed classifications is that margin can be reported. Margin is the residual amount after all variable expenses of making sales are deducted from sales revenue. In other words, margin equals profit after all variable costs are deducted from sales revenue but before fixed costs are deducted from sales revenue. Margin is compared with total fixed costs for the period. This head-to-head comparison of margin and fixed costs is critical. Although it’s hard to know for sure, because the internal profit reporting practices of businesses aren’t publicized or generally available, probably the large majority of companies don’t attempt to classify operating expenses as variable or fixed. Yet for making profit decisions, managers need to know the variable versus fixed nature of their operating expenses.

Article / Updated 11-04-2019

The authoritative standards and rules that govern financial accounting and reporting by businesses in the United States are called generally accepted accounting principles (GAAP). When you read the financial statements of a business, you’re entitled to assume that the business has fully complied with GAAP in reporting its cash flows, profit-making activities, and financial condition — unless the business makes very clear that it prepared its financial statements by using some other basis of accounting or deviated from GAAP in one or more significant respects. If GAAP isn’t the basis for preparing its financial statements, a business should make very clear which other basis of accounting it’s using and avoid using titles for its financial statements that are associated with GAAP. If a business uses a simple cash-receipts and cash-disbursements basis of accounting (which falls way short of GAAP), for example, it shouldn’t use the terms income statement and balance sheet. These terms are part and parcel of GAAP, and their use as titles in financial statements implies that the business is using GAAP. You’re lucky that there’s no room here for a lengthy historical discourse on the development of accounting and financial reporting standards in the United States. The general consensus (backed by law) is that businesses should use consistent accounting methods and terminology. General Motors and Microsoft should use the same accounting methods; so should Wells Fargo and Apple. Businesses in different industries have different types of transactions, of course, but the same types of transactions should be accounted for in the same way. That’s the goal. There are upwards of 7,000 public companies in the United States and more than 1 million privately owned businesses. Should all these businesses use the same accounting methods, terminology, and presentation styles for their financial statements? Ideally, all businesses should use the GAAP rulebook. Privately owned companies aren’t required to follow GAAP rules, although many do. The rulebook permits alternative accounting methods for some transactions, however. Furthermore, accountants have to interpret the rules as they apply GAAP in actual situations. The devil is in the details. In the United States, GAAP constitute the gold standard for preparing financial statements for business entities. The presumption is that any deviations from GAAP would cause misleading financial statements. If a business honestly thinks that it should deviate from GAAP to better reflect the economic reality of its transactions or situation, it should make very clear that it hasn’t complied with GAAP in one or more respects. If deviations from GAAP aren’t disclosed, the business may have legal exposure to those who relied on the information in its financial report and suffered a loss attributable to the misleading nature of the information. Unfortunately, the mechanisms and processes of issuing and enforcing financial reporting and accounting standards are in a state of flux. The biggest changes in the works have to do with the push to internationalize the standards, as well as the movements toward setting different standards for private companies and for small and medium-size business entities. Financial accounting and reporting by government and not-for-profit entities In the grand scheme of things, the world of financial accounting and reporting can be divided into two hemispheres: for-profit business entities and not-for-profit entities. A large body of authoritative rules and standards called GAAP has been hammered out over the years to govern accounting methods and financial reporting of business entities in the United States. Accounting and financial reporting standards have also evolved and been established for government and not-for-profit entities. This book centers on business accounting methods and financial reporting. Financial reporting by government and not-for-profit entities is a broad and diverse territory, and full treatment of it is well beyond the scope of this book. People generally don’t demand financial reports from government and not-for-profit organizations. Federal, state, and local government entities issue financial reports that are in the public domain, although few taxpayers are interested in reading them. When you donate money to a charity, school, or church, you don’t always get financial reports in return. On the other hand, many private, not-for-profit organizations issue financial reports to their members — credit unions, homeowners’ associations, country clubs, mutual insurance companies (owned by their policy holders), pension plans, labor unions, healthcare providers, and so on. The members or participants may have an equity interest or ownership share in the organization; thus, they need financial reports to apprise them of their financial status with the entity. Government and other not-for profit entities should comply with the established accounting and financial reporting standards that apply to their type of entity. Caution: Many not-for-profit entities use accounting methods different from business GAAP (in some cases, very different), and the terminology in their financial reports is somewhat different from that in the financial reports of business entities. Getting to know the U.S. standard-setters Okay, so everyone who reads a financial report is entitled to assume that GAAP has been followed (unless the business clearly discloses that it’s using another basis of accounting). The basic idea behind the development of GAAP is to measure profit and to value assets and liabilities consistently from business to business — to establish broad-scale uniformity in accounting methods for all businesses and to make sure that all accountants are singing the same tune from the same hymnal. The authoritative bodies write the tunes that accountants have to sing. Who are these authoritative bodies? In the United States, the highest-ranking authority in the private (nongovernment) sector for making pronouncements on GAAP and for keeping these accounting standards up to date — is the Financial Accounting Standards Board (FASB). Also, the SEC has broad power over accounting and financial reporting standards for companies whose securities (stocks and bonds) are publicly traded. Actually, the SEC outranks the FASB because it derives its authority from federal securities laws that govern the public issuance and trading in securities. The SEC has on occasion overridden the FASB, but not very often. GAAP also include minimum requirements for disclosure, which refers to how information is classified and presented in financial statements and to the types of information that have to be included with the financial statements, mainly in the form of footnotes. The SEC makes the disclosure rules for public companies. Disclosure rules for private companies are controlled by GAAP. Internationalization of accounting standards (maybe, maybe not) Although it’s a bit of an overstatement, today the investment of capital knows no borders. U.S. capital is invested in European and other countries, and capital from other countries is invested in U.S. businesses. In short, the flow of capital has become international. U.S. GAAP doesn’t bind accounting and financial reporting standards in other countries. In fact, significant differences exist that cause problems in comparing the financial statements of U.S. companies with those in other countries. Outside the United States, the main authoritative accounting standards setter is the International Accounting Standards Board (IASB), which is based in London. The IASB was founded in 2001. More than 7,000 public companies have their securities listed on the several stock exchanges in European Union (EU) countries. In many regards, the IASB operates in a manner similar to that of the FASB in the United States, and the two have very similar missions. The IASB has already issued many standards, which are called International Financial Reporting Standards. For some time, the FASB and IASB have been working together to developing global standards that all businesses would follow, regardless of the country in which a business is domiciled. Political issues and national pride come into play, of course. The term harmonization is favored, which sidesteps difficult issues regarding the future roles of the FASB and IASB in the issuance of international accounting standards. The two rulemaking bodies have had fundamental disagreements on certain accounting issues. It seems doubtful that they’ll agree on a full-fledged universal set of standards. But stay tuned; it’s hard to predict the final outcome. Divorcing public and private companies Traditionally, GAAP and financial reporting standards were viewed as being equally applicable to public companies (generally, large corporations) and private companies (generally, smaller companies). Today, however, we’re witnessing a growing distinction between accounting and financial reporting standards for public and private companies. Although most accountants don’t like to admit it, there’s always been a de facto divergence between the actual financial reporting practices of private companies and the more rigorously enforced standards for public companies. A surprising number of private companies still don’t include a statement of cash flows in their financial reports, for example, even though this statement has been a GAAP requirement since 1975. Although it’s hard to prove one way or the other, my view is that the financial reports of private businesses generally measure up to GAAP standards in all significant respects. At the same time, however, there’s little doubt that the financial reports of some private companies fall short. In May 2012, the FASB established an advisory committee for private-company accounting standards. In setting up the council, the FASB said, “Compliance with GAAP standards for many for-profit private companies is a choice rather than a requirement because private companies can often control who receives their financial information.” The council advises the FASB on the appropriate accounting methodology for private companies when changes in GAAP are being considered. Private companies don’t have many of the accounting problems of large public companies. Many public companies deal in complex derivative instruments, issue stock options to managers, provide highly developed defined-benefit retirement and health benefit plans for their employees, enter into complicated intercompany investment and joint venture operations, have complex organizational structures, and so on. Most private companies don’t have to deal with these issues. Following the rules and bending the rules An often-repeated story concerns three people interviewing for an important accounting position. The candidates are asked one key question: “What’s 2 plus 2?” The first candidate answers, “It’s 4.” The second candidate answers, “Well, most of the time the answer is 4, but sometimes it’s 3, and sometimes it’s 5.” The third candidate answers, “What do you want the answer to be?” Guess who gets the job. This story exaggerates, of course, but it does have an element of truth. The point is that interpreting GAAP isn’t a cut-and-dried process. Many accounting standards leave a lot of room for interpretation. Guidelines would be a better word to describe many accounting rules. Deciding how to account for certain transactions and situations requires seasoned judgment and careful analysis of the rules. Furthermore, many estimates have to be made. Deciding on accounting methods requires, above all else, good faith. A business may resort to “creative” accounting to make profit for the period look better or to make its year-to-year profit less erratic than it really is (which is called income smoothing). Like lawyers who know where to find loopholes, accountants can come up with inventive interpretations that stay within the boundaries of GAAP. These creative accounting techniques are also called massaging the numbers. Massaging the numbers can get out of hand and become accounting fraud, also called cooking the books. Massaging the numbers has some basis in honest differences in interpreting the facts. Cooking the books goes way beyond interpreting facts; this fraud consists of inventing facts and good old-fashioned chicanery.

Article / Updated 11-04-2019

In theory, depreciation expense accounting is straightforward enough: You divide the cost of a fixed asset (except land) among the number of years that the business expects to use the asset. In other words, instead of having a huge lump-sum expense in the year that you make the purchase, you charge a fraction of the cost to expense for each year of the asset’s lifetime. Using this method is much easier on your bottom line in the year of purchase, of course. ©Doubletree Studio/Shutterstock.com Theories are rarely as simple in real life as they are on paper, and this one is no exception. Do you divide the cost evenly across the asset’s lifetime, or do you charge more to certain years than others? Furthermore, when it eventually comes time to dispose of fixed assets, the assets may have some disposable, or salvage, value. In theory, only cost minus the salvage value should be depreciated. But in actual practice, most companies ignore salvage value, and the total cost of a fixed asset is depreciated. Moreover, how do you estimate how long an asset will last in the first place? Do you consult an accountants’ psychic hotline? As it turns out, the Internal Revenue Service runs its own little psychic business on the side, with a crystal ball known as the Internal Revenue Code. Okay, so the IRS can’t tell you that your truck is going to conk out in five years, seven months, and two days. The Internal Revenue Code doesn’t give you predictions of how long your fixed assets will last; it tells you what kind of timeline to use for income tax purposes, as well as how to divide the cost along that timeline. Hundreds of books have been written about depreciation, but the book that really counts is the Internal Revenue Code. Most businesses adopt the useful lives allowed by income tax law for their financial statement accounting; they don’t go to the trouble of keeping a second depreciation schedule for financial reporting. Why complicate things if you don’t have to? Why keep one depreciation schedule for income tax and a second for preparing your financial statements? That said, it may be a different story for some large companies. The IRS rules offer two depreciation methods that can be used for particular classes of assets. Buildings must be depreciated one way, but for other fixed assets, you can take your pick: Straight-line depreciation: With this method, you divide the cost evenly among the years of the asset’s estimated lifetime. Buildings have to be depreciated this way. Assume that a building purchased by a business costs $390,000, and its useful life — according to the tax law — is 39 years. The depreciation expense is $10,000 (1/39 of the cost) for each of the 39 years. You may choose to use the straight-line method for other types of assets. After you start using this method for a particular asset, you can’t change your mind and switch to another depreciation method later. Accelerated depreciation: This term is a generic catch-all for several methods. What all these methods have in common is the fact that they’re front-loading, meaning that you charge a larger amount of depreciation expense in the early years and a smaller amount in the later years. The term accelerated also refers to adopting useful lives that are shorter than realistic estimates. (Few automobiles are useless after five years, for example, but they can be fully depreciated over five years for income tax purposes.) Section 179 is an alternative to using depreciation write-offs. This section was greatly expanded with the new law that took effect on January 1, 2018, and may eliminate the use of depreciation for many new-equipment purchases. Under the new tax law, companies can use Section 179 to write off 100 percent up to $1 million in 2018, and the write-off will be adjusted for inflation each year after that, with the benefit being phased out up to $2.5 million. Before the new tax law, Section 179 allowed a 50 percent write-off up to $500,000. The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September. 27, 2017. Certain property is excluded, so before making a major purchase for which you expect to take advantage of Section 179, be sure to review the purchase with your accountant. The salvage value of fixed assets (the estimated disposal values when the assets are taken to the junkyard or sold off at the end of their useful lives) is ignored in the calculation of depreciation for income tax. Put another way, if a fixed asset is held to the end of its entire depreciation life, its original cost will be fully depreciated, and the fixed asset from that time forward will have a zero book value. (Recall that book value is equal to original cost minus the balance in the accumulated depreciation account.) Fully depreciated fixed assets are grouped with all other fixed assets on external balance sheets. All these long-term resources of a business are reported in one asset account called property, plant and equipment (instead of the fixed assets). If all the fixed assets were fully depreciated, the balance sheet of a company would look rather peculiar; the cost of its fixed assets would be offset by its accumulated depreciation. Keep in mind that the cost of land (as opposed to the structures on the land) isn’t depreciated. The original cost of land stays on the books as long as the business owns the property. The straight-line depreciation method has strong advantages: It’s easy to understand, and it stabilizes the depreciation expense from year to year. Nevertheless, many business managers and accountants favor an accelerated depreciation method to minimize the size of the checks they have to write to the IRS in the early years of using fixed assets. This method lets the business keep the cash for the time being instead of paying more income tax. Keep in mind, however, that the depreciation expense on the annual income statement is higher in the early years when you use an accelerated depreciation method, so bottom-line profit is lower. Many accountants and businesses like accelerated depreciation because it paints a more conservative picture of profit performance in the early years. Fixed assets may lose their economic usefulness to a business sooner than expected, and in this case, using the accelerated depreciation method would look very wise in hindsight. Except for new enterprises, a business typically has a mix of fixed assets — some in their early years of depreciation, some in middle years, and some in later years. There’s a balancing-out effect among the different vintages of fixed assets being depreciated. Therefore, the overall depreciation expense for the year under accelerated depreciation may not be too different from the straight-line depreciation amount. A business doesn’t have to disclose in its external financial report what its depreciation expense would have been if it had used an alternative method. Readers of the financial statements can’t tell how much difference the choice of accounting methods would have caused in depreciation expense that year.