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Strategies & Market Trends : ahhaha's ahs
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To: ahhaha who wrote (4680)7/2/2002 4:41:12 PM
From: GraceZRead Replies (2) of 24758
 
Actually I always thought that the origin came from an attempt to keep track of your original investment in income producing property, apart from the expense associated with operating that property. A business always has a start up expense, even mine which was started in a rented basement with a hundred dollar enlarger. But suppose instead I'd had 300k and wanted to buy the state of the art to start that business. I buy the equipment and the customers show up. If I think in terms of being underwater by 300k, I might quit right there. So I tell myself I have spent 300k and I have 300k on the books as a tangible asset (not unlike principle on a bond that pays interest). Now as the jobs come in, I keep track of revs minus expenses associated with doing that job and now I know why I'm working....profit! I know how to price my product. The excess after all expenses are deducted is the return on my original investment (the 300k).

This is the biggest reason you separate out capital equipment from expenses from operations. You need to know if you are making money from your operations and money from your original investment in capital equipment. OTOH I agree with your distaste with the tax code because it does cause an enormous distortion in the way people allocate capital. You are no longer simply making decisions based on what you need to do to make money, but what you need to do to minimize taxes while still trying to make money.
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