What is appraisal depreciation? Depreciating an asset is a financial term that refers to the decrease in value of something that you own. Some things tend to experience increases in value.
For example, think about your home or stock portfolio. On the other hand, your car is less valuable the second you drive it off of the lot. Intuitively, most of us understand this.
The appraisal method refers to a specific technique used to calculate the amount the value decreased.
Method of Evaluating Loss
Depreciation is used by accountants to refer to the specific decrease in value of an asset over a defined time. One way that you can think of it, how much money have you lost on your investment since you purchased the assets?
Business owners can use this method to help reduce their taxable income. This can be particularly useful if you are trying to sell your business assets. It’s also effective for securing finance. Banks can use the appraiser’s evaluation so that your business can serve as collateral.
Depreciation is a Calculation of Decline in Value of an Asset
In accounting, you must use specific methods of calculation to report your financial filings. Several techniques may be effective. Depending on the accountant, they may suggest that you use the appraisal method. This method uses an appraiser to calculate the subjective value of your asset. Typically, this is called the current market value.
What Is Appraisal Depreciation?: Evaluating an Asset
How do you determine the value of something? This is a question many accountants have tackled for many years. Opinions continue to vary. Nevertheless, two methods have become standard.
The Appraisal Method of Depreciation is a Subjective Calculation
The appraisal method of depreciating an asset is considered a subjective evaluation. It relies on the statements of an appraiser. This is in comparison to other techniques, which are considered objective.
What Is Appraisal Depreciation?: Subjective vs. Objective Evaluations
Something subjective is defined by the opinion of an individual. Objective means that it is measured by something considered to be outside of the realm of human opinion. The best example would be a stock price.
Usually Used During the Sale of a Business
When you are a business owner, and you decide to sell, you must determine how valuable your enterprise is. The appraisal method is the most commonly used in this scenario.
In theory, the appraiser will look at all of your equipment, inventory, and other business assets to calculate the current market value.
What Is Appraisal Depreciation?: The Current Market Value
What is the current market value? For public companies, you can take the total outstanding shares and multiply by the current value. When you are dealing with a private entity, you need to use a different method.
The appraisal method approximates what an enterprise would be sold for on the open market.
How Does the Appraisal Method of Depreciation Work?
As we have stated previously, much of the work is up to the appraiser. The appraiser must calculate the current market value by hand.
Looks at How an Item Decreases in Value
The appraiser will come to the property to check out all of your business’s assets firsthand.
Typically, they will be an expert in whichever industry you operate. That way, they can give a fair evaluation.
Most People Can Relate it to Purchasing a Car
When you drive a car off of the lot, it begins to decrease in value.
By the time you put a few hundred miles on it, it may have lost as much as one-third of its initial value. The equipment operates in much the same way for a business.
An Appraiser Determines the Current Value of an Enterprise
The appraiser will look at the useful lifespan of any machinery used by the enterprise. This is a key difference. Compared to the accounting method, the appraisal method is more subjective.
How Does it Compare to Other Methods of Depreciation
The appraisal method is not the only method used in the world of finance. The other most common method would be the accounting method. If you would like to use the accounting method to calculate the value of depreciating assets, it is slightly different.
Accounting Method
This method aligns expenses with income. For instance, a business that wants to minimize their taxes can use this against their taxable income. It compares the current value to the initial value.
Appraisal Method
Primarily, it determines the current market value of an enterprise. Useful if you would like to use the business as collateral to secure financing.
Additional Considerations Regarding the Appraisal Method of Depreciation
It would be best to rely on the wisdom of professionals. If you are considering using this method, talk to an accountant.
Due to its subjective nature, there is some controversy regarding its use. However, it can be effective in some situations.
If you are a business owner, you could use this method to secure financing.
By using your business as collateral, lending institutions can take risks. The current market value tells the bank how much of a risk it can take.
Subjective vs. Objective
The debate over which method to use comes down to one topic. Should you use a subjective method or an objective method? Opinions vary widely in the field.
However, most would agree that the subjective method is effective in particular circumstances.
Rely on Professionals
If you want to use the appraisal method, you should always rely on professionals. As a business owner, tax mistakes can be costly. We would love to help go over all of your books. That way, you don’t have anything to worry about.
If you’re interested in a free quote, call us at 1-801-882-2292! Our team is ready and waiting. If you have any questions, then we have answers.
