How to Amortize Industrial Equipment?
Amortization is essential as it works like a forecasting media for investors to understand the business and future costs. Amortizing is related to intangible assets, and it cuts the business’s tax liability and sums up the core earnings. Industrial equipment is mainly a tangible asset as they have actual existence. But as the terms amortization and depreciation are pretty similar, we might call the method amortization.
Ways to Amortize Industrial Equipment
First, the total cost of that equipment is initiated by considering the price per piece value. For this, you can use spreadsheets, an integrated GMAO software, or you can just do it manually.
Then considering the machine, it can also be divided into two possible ways. Firstly, in a shared equipment, the machine will operate all of its functions. And in a second way is the dedicated equipment where it’ll just perform one reserved task.
For shared equipment, it performs several tasks and takes more time than usual. And in the amortization period, it can produce anything in its capacity. For this equipment, the cost per hour of the equipment is divided by the pieces per hour. Here you have the amortization per piece value.
The dedicated equipment is mainly the customized components that are produced to produce only a singular output. For this, we need the number of parts manufactured in the amortized period. We have to subtract the residual value from its original value and divide that value by the number of parts produced.
Two Types of Amortization
One is the amortization of loans, and another is the amortization of assets such as industrial equipment or Good wills or patents. The amortization of investments like this depends on the ‘economical’ or ‘legal’ or the ‘useful’ life as the industrial equipment is a fixed asset; other constituents play a lead role here, such as wear and tear of that equipment.
Why amortization of industrial equipment is compulsory?
Amortization is essential as this sums up the actual cost of that particular piece of machinery. Thus, the carrying amount has been reduced to its salvage rate as its “serviceable” or “economical” life is over.
1. Life Span
There is no such thing as a lifelong time limit for machinery. It tends to lose its value over time and use.
2. Wear and Tear
Industrial equipment tends to be tougher and designed to overcome environmental resistance ideally. But with time, those characteristics change or reduce—That’s why every manufacturer sets a time limit for their products.
3. Usage Time Limit
Apart from the hardware, other equipment like software or databases are used for a limited amount of time. And when the usage limit expires, amortization has to be conducted.
4. Incompetence
Some equipment cannot keep up with the changing requirements over time.
5. Others
There can be other criteria playing a part, like using natural resources (oil, gas). These sources can deplete over time.
Now that we know why the amortization is performed in ground sources in the industry, let’s talk about how it is done.
Yearly Amortized Expense
You can calculate this value every year to get an amortized expense yearly. At the end of its time, there will be no residual value for that equipment, and it’ll be simply the original value divided by the lifetime.