I had the privilege of being able to take a couple of years of
accounting. It has helped me a great deal in understanding my
business. If you ever have a chance to take an adult evening
accounting course, try accounting. you might just find it very
useful, including how to price your pieces so that you have the most
efficient business model for the way you do business.
As for your questions:
What do you do when you get to the end of that time period and a
piece of equipment is still fine to work with
Income = Revenue Expenses. This is one of the prime concepts of
You are taxed on your Income. When you are amortize one of your
pieces of equipment (an asset) you are saying that you are paying
"rent" for that piece. The "rent", is an expense representing the
cost of using that equipment, knowing full well that you have to
replace it some day. Technically it is called an amortization expense
and lowers the In come that your are declaring
Now let's say that you have fully amortized the piece of equipment
you bought five years ago and you decided that it would last only
five years. That means its "residual value" is =240. Now, let's say
that you sold it for ten dollars. The entry is "gain on sale". You
are obligated to declare that =2410 as part of your income (at least
in Canada you are).
How do you account for purchases of new equipment
When you buy a piece of equipment you are trading one asset (item
bringing future economic benefits) for another. in this case
equipment for cash (you may have borrowed the cash in which case you
have a liability matched against that cash). In Canada you are
allowed to declare only one-half of the amortization expense for the
year in which you bought the equipment.
You need to consult an accountant to help you decide what to deem an
item is when you buy it. It can be an expense (paper towels because
they are used in the year of doing business) or an asset (a rolling
mill that you can use for many years).
I used to provide seminars on these topics to people who were
considering a move to operating their own business. What I had to
get across to them was the difference between fixed costs (costs
that, no matter what happens, you must pay even if you have sold
nothing) and variable costs (costs that vary according to the number
of items you make and sell). It discouraged a lot of people from
starting their own business, but it saved a lot of them from losing
their shirt. And a word of advice, it's the fixed costs that will
kill you every time.
Most importantly, find an accountant who can help you. The right
accountant will help you thrive no matter what business models you
I am not an accountant. I just have great respect for them.