I am just curious how you guys factor in capital upgrades into your calculations of net income.
In my calculation for net income, I accrue for tax/interest/insurance to spread these costs over the year so that we have a smooth net income amount to go off of. However, when I complete an upgrade, say a $10,000 roof, how should I expense this? I am currently just assetting the upgrade on our balance sheet and then depreciating the roof over its tax life (27.5 years), meaning we have a depreciation expense for the roof every month.
I just want to gauge what other people are doing for their calculations.
@Trevor Dominique - This is a capital expenditure which does not flow to net income - you are accounting for it correctly by depreciating it over 27.5 years (some CapEx items can be depreciated more quickly, there are lists and discussions on this worth further reading). If you are trying to evaluate the cashflow of your business, there are several steps you can take to get from Net Income to cashflow.
You need to distinguish that which most accurately reflects true operating results, and that which is most beneficial tax wise. That’s why most companies LEGALLY maintain two sets of books
Some people have two sets of calculations - One for tax and one for cash-flow.
I think both would treat the $10,000 similar, its a capital expenditure and would be treated similar to the purchase of a house.
Hopefully the $10,000 roof will last 15 years, 20 years or even longer.