Return on Software: Maximizing the Return on Your Software Investment

Depreciation Accounting

The key idea in depreciation accounting is that corporations are taxed on profit (net income), not gross income:

Profit = Gross income – Expenses

The expenses charged by the organization in any tax year should be an accurate reflection of the actual expenses incurred during that year. Therefore, those expenses should include at least an approximation of the actual depreciation of the assets the company owns. Through depreciation accounting, the tax authorities are trying to force the accounting and tax recognition of an asset's loss in value to be as close in time as reasonably possible to when that loss actually happens.

Depreciation accounting effectively treats the original cost of an asset as a prepaid expense. Instead ...