Background
Vehicles are a major part of any business, they help a company to stay competitive in the marketplace. Vehicle costs are one of the largest expenses for a company, and it is important to manage these costs to avoid draining resources. Should vehicles be classified as part of the machinery and equipment account or should they be treated differently? This article examines the pros and cons of both options so businesses can make an informed decision on which type of accounting will best serve their interests.
Pro: Keep Vehicles as Part of the Machinery and Equipment Account
The primary benefit of classifying vehicles as part of the machinery and equipment account is ease of tracking expenditures. By combining vehicle costs with other machinery and equipment expenses, a business can quickly identify cost outliers and ensure its capital investments are being used productively. Furthermore, the ability to track costs more closely helps to identify budget issues earlier on, allowing a business to make adjustments before the problems become too large.
Con: Separate Vehicles from the Machinery and Equipment Account
On the flipside, some experts believe that keeping vehicle costs separate from other machinery and equipment expenses is preferable. By housing vehicle costs in an individual account, businesses have the ability to identify vehicle-specific problems and assess the overall efficiency of their fleet. Furthermore, businesses can use the individual account to create more detailed balance sheets and present a more accurate picture of fiscal health.
Data Analysis
Data analysis can help to better understand the pros and cons of both options. According to a study conducted by the Small Business Administration, businesses that have separate accounts for vehicles have more effective controls over their capital investments. The study also found that, over time, businesses with separate vehicle accounts tend to better cash flow and be more cost effective.
Perspective from Experts
Experts agree that, while it is preferable to have a separate vehicle account, there are scenarios where it may be better to have them part of the machinery and equipment account. For example, businesses that operate a fleet of vehicles may find that keeping them as part of the machinery and equipment account is more cost effective as they have the ability to better manage their fleet costs this way.
Insights and Analysis
Not all businesses operate the same type of vehicles or have the same budget, so the answer as to whether vehicles should be under the machinery and equipment account is highly individual. Businesses need to weigh the various pros and cons and analyze their own internal needs to get to the right answer.
fiscal and cash flow benefits
Having a separate vehicle account can lead to fiscal and cash flow benefits for businesses. Since the costs of vehicles are separated from other costs, businesses can clearly identify their spending and immediately address any issues that arise. It also gives a business the ability to plan and budget more effectively, which can lead to greater fiscal stability.
Tax Benefits
One of the main advantages of keeping vehicles separate from the machinery and equipment account is the potential for tax benefits. Since the vehicle account is separate, businesses can take advantage of vehicle-specific tax deductions that can lower their overall tax burden. Additionally, businesses may even be eligible for additional deductions when filing taxes, as vehicles are considered a capital asset.
Advantages and Disadvantages for All Companies
Not all businesses are the same, so it is important to consider both the advantages and disadvantages of keeping vehicles separate from the machinery and equipment account. While larger businesses may find it beneficial to separate the accounts, smaller businesses may find it cumbersome due to the extra effort required to track them separately. Businesses should weigh the various pros and cons to decide which option is best for them.
Disruptions in Accounting Practices
Another factor to consider when deciding whether to keep vehicles separate or part of the machinery and equipment account is the potential disruptions in accounting practices. Having a vehicle account alongside the machinery and equipment account may require businesses to make changes to existing accounting processes. Changes to the accounting processes could lead to delays in reporting financial information as well as potential errors.
Advantages of Vehicle Leasing
Businesses should also consider the advantages of leasing a vehicle rather than buying it. Leasing a vehicle has a number of benefits, such as reducing upfront costs, avoiding long-term obligations, being able to access the latest models of vehicles and eliminating the worries associated with ownership. There are also some tax benefits to leasing, so businesses should thoroughly consider both lease and purchase options.
Manage Risk by Assessing Vehicles Regularly
Businesses must also ensure that they assess the health of their vehicles regularly to manage vehicle risk. Regular checks can help to identify problems that need to be addressed before they escalate and lead to costly repairs or replacements. Furthermore, regular assessments can help businesses to create more accurate depreciation schedules and avoid unnecessary expenses.
