This video on straight line depreciation is part of the Accounting 101 playlist: th-cam.com/video/b93KBmcXanI/w-d-xo.html&pp=gAQBiAQB Highly recommended if you want to learn the basic elements of accounting in an easy to understand way! 😎
Agree! I have learned a lot more about depreciation "in real life" since taking the accounting class myself years ago: capitalized maintenance, lumping smaller projects together into one bigger one to meet capitalization thresholds, competitive depreciation (as described in the section about extending estimated useful lives by tech companies at the end), etcetera.
Go for it!!! There is a lot to discover in the world of finance. For me personally, going through the financial statements of real world companies always helps to uncover new topics that are essential to learn: th-cam.com/video/J_1F8GoLOI8/w-d-xo.html&pp=gAQBiAQB
This was another great video as always. Really appreciated the use of real life examples too, to drive home the purposes of impact of depreciation - thank you!
@@TheFinanceStoryteller Absolutely. I do actually forward conceptual videos when needed. They come in handy. Also, I make sure to like all the videos. 🤘
Wonderful to hear that! Welcome to the channel. I think a good playlist for you to explore is the Accounting 101 playlist, which includes a related video on double declining balance depreciation and many other good ones: th-cam.com/video/8vDt3ZF9hOA/w-d-xo.html&pp=gAQBiAQB
Hey man, great videos! Pleae, can you make a video about calculation of manteinance capex? I find its value few times on annual reports Thank you so much! Greatings from Italy 😊
Grazie 1000! Maybe my video on CapEx vs OpEx can help: th-cam.com/video/na4jbAh_vkQ/w-d-xo.htmlsi=FpqlmLeF8wifPdb9 I think what you are referring to is the common practice of recording the hours that the maintenance team spends on regular maintenance as an expense, but any hours spent on improvement/upgrade of production equipment as an increase of the value of the fixed asset?
At 8 minute, Alphabet adjust the estimate useful lifes of servers from 4 to 6 years, and network equipment from 5 to 6 years, so the depreciation expense downside, not upside.
The terms upside and downside are used in business from the perspective of being favorable or unfavorable to the P&L. Spreading depreciation over more years, and therefore decreasing the depreciation expense for the current year, is a favorable event for the P&L. Hence upside.
What I said is true. I have been in a lot of "gap closing" meetings in my business life, where the profitability we were aiming for was higher than the actuals we had recorded so far. The standard question was: who can bring upside (more profitability), how do we mitigate the downside risks (of less profitability). Also sometimes labeled "good guys" and "bad guys".
If I buy a laptop for €1000, and expect to use it for 5 years, but tomorrow I spill my coffee on it, that laptop will have a value of €0. But you'll still be writing it down in your books. Therefore I think, once again, that you're wrong. Again you give the accountant an additional workload no one asked for. At around 6:20 you say "Finance people and Engineers need to work together", to do what exactly? To waste time on trying to predict how long something will last? 100% of the time they will be wrong with their estimates. You buy a laptop today, you depreciate it to 0, today. You use the laptop however long it makes sense to do so. Keep it simple, please!
If the coffee spill has fatal consequences (as in: the laptop is now broken and cannot be repaired), then its value will indeed be zero, and it needs be fully depreciated immediately. That's called an asset impairment. I feel there's a lot of frustration and aggression in your words, which you choose to project on me. I find that unfair. Nevertheless, I will answer to your questions and comments anyway. The accountant is there to put together a fair and accurate presentation of the financial situation. If you record an asset that will be used for multiple years, to expense at the moment of purchase, then you violate the matching principle: expenses should be recorded during the period in which they are incurred. It would understate the profitability in the current period (because you record too much in expenses), and overstate the profitability in future periods (because there is nothing to depreciate anymore). Not allowed in your corporate tax return, and not allowed under the accounting rules that companies use to report to the stock market. The point that I think you are trying to make is that in the grand scheme of things, these amounts don't matter much, as they make very little difference to the total. You are invoking the accounting principle of materiality: the threshold above which missing or incorrect information in financial statements is considered to impact the fair and accurate representation of the financial situation. What if it's 1000 laptops, rather than just one, for a company that employs 1000 people? Surely that €1 million that you propose to book straight way to expense makes a big difference in the financials.
@@TheFinanceStoryteller You’re correct in your assessment that I’m frustrated. I apologize if it comes across as aggressive. If I buy 1 laptop or a 1000 laptops doesn’t make much of a difference imho. If I spend €1.000.000 on laptops today, then that’s €1.000.000 I’m not spending on other things. Thus regardless on how long those laptops last the expense stays the same. It’s money that left the company. And it will be booked the moment this transaction happened. While you’re correct that in year 1 I might not be profitable, but the years after I will have a higher profit than usual. If that’s the case then I would have to pay taxes for those consecutive years just the same. Unless I’m paying for those laptops over a 5 year period, I feel your method is incorrect and should be illegal because you’re being creative with the actual valuation of the company. Your method makes the company look as if it’s less profitable than what it actually is. Because you’re writing things down that have already been paid years prior. If day 1 I have €1.000.000 in the bank. Then my company has a valuation of €1.000.000 Day 2 I buy 1000 laptops. And have €0 in the bank. Then my company valuation is €0. If my company goes bankrupt and those laptops are sold off, I will have excess money left over. If your company goes bankrupt it will appear as if you have more than what you actually have and you’ll end up short. Am I wrong?
What you are proposing is to use the cash basis accounting method. What I am describing in my videos (and what is very widely used in the business world) is accrual accounting. Have a look at this video from another channel in the finance space that explains the methods, and goes through a simple example: th-cam.com/video/GEZZftO_VrE/w-d-xo.htmlsi=BEGLMzpp37XOdnzC Hopefully that clarifies things.
@@TheFinanceStoryteller Thank you, I appreciate it more than I’m able to express. What happens if a customer doesn’t pay? Wouldn’t this result in me paying taxes on revenue that I have not actually received? I’m worried that accrued accounting is going to bankrupt my company. To use the example of the video, I buy goods on Monday and pay on Friday. It essentially means taking on an interest free loan. I understand it’s a growth hack and applies leverage. However if by the end of the week my customers haven’t paid me, then I will end up in a situation where I’m unable to pay my suppliers. If this happens often it will deteriorate the relationship I have with those suppliers. Perhaps they choose not to do business with me anymore, which in turn creates more problems for me. Either way the taxman is going to want their cut. Accrued accounting sounds like a death spiral waiting to happen. In the video she has a revenue of 600 using cash accounting, but 800 using accrued accounting. It’s a projection of the future rather than giving an accurate representation of the business today. Would you disagree with me? Thx.
Yes, I disagree with you in some of the aspects of what you write, and agree in other parts. Accrual accounting itself is not going to bankrupt your company. Not raising enough capital when you start a company, or spending too much, or paying yourself (as the owner) a dividend that puts the business continuity of the company at risk, or not having a product that generates enough margin, etcetera, etcetera, WILL bankrupt your company. The profit calculated in Leila Gharani's video under the accrual accounting method makes sense to me, and I see it as a fair and accurate representation of the business situation she describes. The accrual accounting method has been developed over centuries, is widely used everywhere in the world, and adapted/updated over time to deal with new situations, and progressing insights on accounting. Every business has risks, these can be of an operational nature, but also strategic, or financial. Risk management and having solid business practices are independent from the accounting methodology you choose to use. In the country where I live, the Netherlands, you can proactively reach out to the tax authorities in case of business cash flow problems, and agree on a payment plan, in case you run into temporary issues (but not when there is a structural issue about the abilities for a business to be viable in the long term). My personal experience is that they are very reasonable. If a customer doesn't pay, you record an allowance for doubtful debt or a full write-off of the invoices that were due (obviously backed up by an audit trail of you sending reminders and trying to enforce payment, possibly even taking legal action). The write-off of a receivable is a tax-deductible expense. So if you did already pay taxes on those revenues, you will get a "refund". And if you live in a country with a VAT system, and have output VAT on your invoice to the client, you can arrange to not have to transfer that VAT amount to (or get it repaid by) the tax authorities. What I do agree with you, is that working capital management is essential. Keep a good relationship with customers as well as suppliers, and build trust. Try to get paid as soon as possible by your customers (maybe be even upfront before you deliver goods or services), keep inventory as low as possible (while avoiding stockouts), and try to negotiate with suppliers to pay them as late as possible. That's how retail companies stay in business. They have low margins on the products they sell, but manage their working capital very well (getting paid before they have to pay others), so they tend to perform better on cash flow generation than on profitability. What I am reading between the lines is that you find the system of accrual accounting a bit reckless. An important part of the checks and balances in the accounting systems are accounting principles such as conservatism (also known as prudence), consistency, full disclosure, going concern, matching, materiality, and objectivity. The counterbalance to possible recklessness is conservatism, or prudence. The main idea here is that it’s better to be safe than sorry. According to the conservatism principle, all anticipated or probable losses are recorded as and when they occur, while anticipated profits are not recorded, but only when the profits are earned. Hope this helps!
This video on straight line depreciation is part of the Accounting 101 playlist: th-cam.com/video/b93KBmcXanI/w-d-xo.html&pp=gAQBiAQB Highly recommended if you want to learn the basic elements of accounting in an easy to understand way! 😎
Thank you su much! I will watch all of them! 👍🏻
Great to hear! Let me know what you think of the other videos in the playlist.
I remember learning this in my first accounting course years ago. Always great to review!
Agree! I have learned a lot more about depreciation "in real life" since taking the accounting class myself years ago: capitalized maintenance, lumping smaller projects together into one bigger one to meet capitalization thresholds, competitive depreciation (as described in the section about extending estimated useful lives by tech companies at the end), etcetera.
I'm trying to start a career in finance and your videos help me out a lot!
Go for it!!! There is a lot to discover in the world of finance. For me personally, going through the financial statements of real world companies always helps to uncover new topics that are essential to learn: th-cam.com/video/J_1F8GoLOI8/w-d-xo.html&pp=gAQBiAQB
This was another great video as always. Really appreciated the use of real life examples too, to drive home the purposes of impact of depreciation - thank you!
Yeah, it becomes a lot more relevant when you look at the real world!!!
Just wanted to say I love your videos. Keep up the good work 👍
Thank you so much!!!!! That's wonderful to hear. Please spread the word to friends and colleagues.
@@TheFinanceStoryteller Absolutely. I do actually forward conceptual videos when needed. They come in handy. Also, I make sure to like all the videos. 🤘
Awesome!!! I am seeing some positive trends in views, watchtime and subscriber count. Every view, like and comment helps!!!
@@TheFinanceStoryteller Awesome. You are not posting into oblivion. I see them. 🤘😆
Same! You explain accounting principles in such an easy to understand. Please keep doing the good work!. I share them often.
Just discovered your channel, i’m a fan already after one video 🧑💻
Wonderful to hear that! Welcome to the channel. I think a good playlist for you to explore is the Accounting 101 playlist, which includes a related video on double declining balance depreciation and many other good ones: th-cam.com/video/8vDt3ZF9hOA/w-d-xo.html&pp=gAQBiAQB
At the next protest I come across (regardless of cause) I will carry a sign that reads: "Estimated Useful Lives Matter!"
That would be most appropriate outside the FASB building, when they are going through an accounting standard revision. ;-)
Hey man, great videos! Pleae, can you make a video about calculation of manteinance capex? I find its value few times on annual reports Thank you so much! Greatings from Italy 😊
Grazie 1000! Maybe my video on CapEx vs OpEx can help: th-cam.com/video/na4jbAh_vkQ/w-d-xo.htmlsi=FpqlmLeF8wifPdb9 I think what you are referring to is the common practice of recording the hours that the maintenance team spends on regular maintenance as an expense, but any hours spent on improvement/upgrade of production equipment as an increase of the value of the fixed asset?
👍
😊
At 8 minute, Alphabet adjust the estimate useful lifes of servers from 4 to 6 years, and network equipment from 5 to 6 years, so the depreciation expense downside, not upside.
The terms upside and downside are used in business from the perspective of being favorable or unfavorable to the P&L. Spreading depreciation over more years, and therefore decreasing the depreciation expense for the current year, is a favorable event for the P&L. Hence upside.
Quote "$3.4B of depreciation expense upside. "， the subject is expense, not profit. If what you said is true, English is too interesting.😅😅
What I said is true. I have been in a lot of "gap closing" meetings in my business life, where the profitability we were aiming for was higher than the actuals we had recorded so far. The standard question was: who can bring upside (more profitability), how do we mitigate the downside risks (of less profitability). Also sometimes labeled "good guys" and "bad guys".
If I buy a laptop for €1000, and expect to use it for 5 years, but tomorrow I spill my coffee on it, that laptop will have a value of €0. But you'll still be writing it down in your books.
Therefore I think, once again, that you're wrong. Again you give the accountant an additional workload no one asked for. At around 6:20 you say "Finance people and Engineers need to work together", to do what exactly? To waste time on trying to predict how long something will last? 100% of the time they will be wrong with their estimates.
You buy a laptop today, you depreciate it to 0, today. You use the laptop however long it makes sense to do so.
Keep it simple, please!
If the coffee spill has fatal consequences (as in: the laptop is now broken and cannot be repaired), then its value will indeed be zero, and it needs be fully depreciated immediately. That's called an asset impairment.
I feel there's a lot of frustration and aggression in your words, which you choose to project on me. I find that unfair. Nevertheless, I will answer to your questions and comments anyway. The accountant is there to put together a fair and accurate presentation of the financial situation. If you record an asset that will be used for multiple years, to expense at the moment of purchase, then you violate the matching principle: expenses should be recorded during the period in which they are incurred. It would understate the profitability in the current period (because you record too much in expenses), and overstate the profitability in future periods (because there is nothing to depreciate anymore). Not allowed in your corporate tax return, and not allowed under the accounting rules that companies use to report to the stock market.
The point that I think you are trying to make is that in the grand scheme of things, these amounts don't matter much, as they make very little difference to the total. You are invoking the accounting principle of materiality: the threshold above which missing or incorrect information in financial statements is considered to impact the fair and accurate representation of the financial situation. What if it's 1000 laptops, rather than just one, for a company that employs 1000 people? Surely that €1 million that you propose to book straight way to expense makes a big difference in the financials.
@@TheFinanceStoryteller
You’re correct in your assessment that I’m frustrated. I apologize if it comes across as aggressive.
If I buy 1 laptop or a 1000 laptops doesn’t make much of a difference imho.
If I spend €1.000.000 on laptops today, then that’s €1.000.000 I’m not spending on other things. Thus regardless on how long those laptops last the expense stays the same.
It’s money that left the company.
And it will be booked the moment this transaction happened.
While you’re correct that in year 1 I might not be profitable, but the years after I will have a higher profit than usual.
If that’s the case then I would have to pay taxes for those consecutive years just the same.
Unless I’m paying for those laptops over a 5 year period, I feel your method is incorrect and should be illegal because you’re being creative with the actual valuation of the company. Your method makes the company look as if it’s less profitable than what it actually is. Because you’re writing things down that have already been paid years prior.
If day 1 I have €1.000.000 in the bank. Then my company has a valuation of €1.000.000
Day 2 I buy 1000 laptops. And have €0 in the bank. Then my company valuation is €0.
If my company goes bankrupt and those laptops are sold off, I will have excess money left over.
If your company goes bankrupt it will appear as if you have more than what you actually have and you’ll end up short.
Am I wrong?
What you are proposing is to use the cash basis accounting method. What I am describing in my videos (and what is very widely used in the business world) is accrual accounting. Have a look at this video from another channel in the finance space that explains the methods, and goes through a simple example: th-cam.com/video/GEZZftO_VrE/w-d-xo.htmlsi=BEGLMzpp37XOdnzC Hopefully that clarifies things.
@@TheFinanceStoryteller
Thank you, I appreciate it more than I’m able to express.
What happens if a customer doesn’t pay?
Wouldn’t this result in me paying taxes on revenue that I have not actually received?
I’m worried that accrued accounting is going to bankrupt my company.
To use the example of the video, I buy goods on Monday and pay on Friday.
It essentially means taking on an interest free loan. I understand it’s a growth hack and applies leverage.
However if by the end of the week my customers haven’t paid me, then I will end up in a situation where I’m unable to pay my suppliers. If this happens often it will deteriorate the relationship I have with those suppliers. Perhaps they choose not to do business with me anymore, which in turn creates more problems for me.
Either way the taxman is going to want their cut.
Accrued accounting sounds like a death spiral waiting to happen.
In the video she has a revenue of 600 using cash accounting, but 800 using accrued accounting. It’s a projection of the future rather than giving an accurate representation of the business today.
Would you disagree with me?
Thx.
Yes, I disagree with you in some of the aspects of what you write, and agree in other parts. Accrual accounting itself is not going to bankrupt your company. Not raising enough capital when you start a company, or spending too much, or paying yourself (as the owner) a dividend that puts the business continuity of the company at risk, or not having a product that generates enough margin, etcetera, etcetera, WILL bankrupt your company.
The profit calculated in Leila Gharani's video under the accrual accounting method makes sense to me, and I see it as a fair and accurate representation of the business situation she describes. The accrual accounting method has been developed over centuries, is widely used everywhere in the world, and adapted/updated over time to deal with new situations, and progressing insights on accounting.
Every business has risks, these can be of an operational nature, but also strategic, or financial. Risk management and having solid business practices are independent from the accounting methodology you choose to use.
In the country where I live, the Netherlands, you can proactively reach out to the tax authorities in case of business cash flow problems, and agree on a payment plan, in case you run into temporary issues (but not when there is a structural issue about the abilities for a business to be viable in the long term). My personal experience is that they are very reasonable.
If a customer doesn't pay, you record an allowance for doubtful debt or a full write-off of the invoices that were due (obviously backed up by an audit trail of you sending reminders and trying to enforce payment, possibly even taking legal action). The write-off of a receivable is a tax-deductible expense. So if you did already pay taxes on those revenues, you will get a "refund". And if you live in a country with a VAT system, and have output VAT on your invoice to the client, you can arrange to not have to transfer that VAT amount to (or get it repaid by) the tax authorities.
What I do agree with you, is that working capital management is essential. Keep a good relationship with customers as well as suppliers, and build trust. Try to get paid as soon as possible by your customers (maybe be even upfront before you deliver goods or services), keep inventory as low as possible (while avoiding stockouts), and try to negotiate with suppliers to pay them as late as possible. That's how retail companies stay in business. They have low margins on the products they sell, but manage their working capital very well (getting paid before they have to pay others), so they tend to perform better on cash flow generation than on profitability.
What I am reading between the lines is that you find the system of accrual accounting a bit reckless. An important part of the checks and balances in the accounting systems are accounting principles such as conservatism (also known as prudence), consistency, full disclosure, going concern, matching, materiality, and objectivity. The counterbalance to possible recklessness is conservatism, or prudence. The main idea here is that it’s better to be safe than sorry. According to the conservatism principle, all anticipated or probable losses are recorded as and when they occur, while anticipated profits are not recorded, but only when the profits are earned.
Hope this helps!