Question

Steve is the practice administrator of a medical group practice (for-profit) and the organization just financed the purchase of a large fluoroscopy machine in their outpatient procedure suite. At the following board meeting, the physician owners as Steve about the tight budget constraints that are projected, partially due to the new monthly payments for the fluoroscopy machine bank loan. Specifically, they question the administrator’s recommendation to depreciate the machine, therefore using such funds for regular/daily operating expenses, instead of funding the accumulated depreciation account.

Using quotations (as if you were actually responding to the physician owners in this situation), respond to the doctors’ request. Keeping in mind that you work for them, provide a brief explanation as to the importance of depreciating large assets and use several reasons or examples to clarify to them your position/suggestion.

Answer 1

"Depreciation is the decrease in value of an asset due to use, normal wear and tear or obsolescence."

• The economical benefit generated from a large asset spread over many years and not only restricted to the year of purchase. Hence, it is appropriate to depreciate it according to its use over many years.
• Though depreciation is not a source of income but being a tax deductible expense it helps in creating a reserve for replacing the old asset with future assets.
• Helps in reporting the correct book value of assets by subtracting the depreciation because of normal wear and tear.
• Depreciation also helps in lowering taxable income resulting into higher tax savings.

Therefore, the importance of depreciation is worth giving some consideration.