What's DEPRECIATION?
Shehab is a young dentist who decided to start his own business. He had enough money to make a dental clinic. The clinic was well-equipped, the location was nice, and Shehab is a skilled dentist. So, the business was profitable. Years passed by and Dr. Shehab was working happily, he bought a new car as well.
Then one day -about five years since starting his business- the dental unit got wrecked, and the maintenance report showed that it needs a fortune for repair. Shehab got shocked upon hearing this, and he phoned his friend Sherif to ask him if he has an opinion about how to handle such a crisis. Sherif got astonished that Shehab didn't take DEPRECIATION into consideration, and that he used to spend all the income through the past years.
What's DEPRECIATION?
Depreciation is an amount of the income that should be retained and not considered as profit.
Why?
Because every asset (equipment, furniture,..etc.) has a life expectancy after which it will not be useful, and a new one will be purchased. The amount of money retained as depreciation will be used to buy this new asset.
How is an asset depreciated?
This depends on the life expectancy of the asset. A building is depreciated over 10 years, furniture and equipment are depreciated over 5 years. However, each business is free to depreciate each asset according to its life expectancy in this industry. As a rule, the only asset that is not depreciated is land.
If you have a business, you don't want to get in a financial crisis. Calculate your amount depreciation, and retain it monthly.
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