Page 405 - Business Principles and Management

Unit 5

Property may also decrease in value because of obsolescence. That is, even
facts & though the asset is still usable, it becomes out-of-date or inadequate for a partic-
ular purpose. An older computer, for example, may not have the capacity to run
figures new software or manage the number of transactions as a business grows. Even
though the computer still functions, it is obsolete and no longer as valuable to
the business. Therefore, obsolescence is a form of depreciation.
The financial loss due to depreciation is very real, although it usually can-
not be computed with great accuracy. Therefore, the Internal Revenue Service
The earliest civilizations in (IRS) provides rules and procedures that businesses must follow in calculating
Babylonia, Egypt, Peru, Greece, depreciation. Businesses need to maintain depreciation records and use them
China, and Rome used record in their planning so they have money available to replace assets when they
keeping much as we do today. wear out.
Governments kept records of
receipts and payments, espe-
cially of tax collections. Wealthy SPECIAL ASSET RECORDS
people also demanded that
those who took care of their Financial statements list assets and their values, but they do not provide detailed
property keep good records information about these assets. As a result, a business must keep special records.
to prove they did the work For example, a business should maintain a precise record of insurance policies,
properly. showing such details as type of policy, the company from which it was pur-
chased, amount, premium, purchase and expiration dates, and the amount to
be charged each month as insurance expense. A business also maintains detailed
special records for all fixed assets, such as trucks and forklifts. These records
provide such information as asset description, date of purchase, cost, monthly
depreciation expense, and asset book value. Asset book value is the original cost
less accumulated depreciation. In the Jiffy Lube example above, the equipment
depreciates at a rate of $3,000 per year. At the end of the second year, the $16,000
equipment will have an asset book value of $10,000:
$3,000 depreciation 2 years $6,000 accumulated depreciation
$16,000 $6,000 $10,000 asset book value at the end of year 2

TAX AND PAYROLL RECORDS

Federal and state income tax laws require every business to keep satisfactory
records in order to report its income and expenses, file required forms, and calcu-
late and pay all required taxes. The law requires employers to withhold a certain
percentage of each employee’s wages for federal income tax purposes. It must
do the same for Social Security, Medicare, and Medicaid. Other payments that
employers must make to federal and state governments are for business taxes
and government-sponsored unemployment compensation insurance.
For business planning as well as for tax purposes, businesses must keep
detailed payroll records for each employee: hours worked, wage or salary rate,
regular and overtime wages paid, and all types of deductions and withholding
made from the employees’ wages. Companies also record the value of benefits
paid for each employee such as health insurance, paid vacation, and retirement
benefits.
Each employee must fill out a W-4 form that provides information on the
number of family members and exemptions. Using this information and a table
furnished by the Internal Revenue Service, the employer determines the amount
to withhold from the employee’s paycheck. Employers submit payments of these
withholdings to the IRS. Most companies use a computerized payroll system to
maintain personnel records, to calculate payroll, and to process payments for each
employee. Payroll information for an employee generated with QuickBooks ®
software is shown in Figure 15-2.

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