Cost Recovery Definition
Cost recovery, defined as the method to recovering an expenditure which a business takes on, is both a specific and general term. Generally, cost recovery is simply recovering the costs of any given expense. This can be the initial startup costs of the business by meeting and exceeding the break even point, the cost of an investment through evaluating the return on investment, or even the cost of capital taken to finance the firm. Specifically, the cost recovery method of accounting gains back the cost of an investment by relying on the certified depreciation schedule of the item.
Cost Recovery Explanation
Cost recovery, explained simply as regaining the value of an expense, is an important concept for accountants and company founders alike. Each of these parties are interested in cost recovery solutions.
For entrepreneurs, cost recovery methods are an important concept. Founders of a company are interested in evaluating and optimizing the benefit of their effort, especially their capital. Without moving too extensively into the subject, start by evaluating the return on investment of anything: the business as a whole, a piece of equipment, even a hired employee. Even more, an entrepreneur is truly interested in return on equity; explained simply as the return on their investment interest. This differs from return on investment which measures the return on the entire investment.
For accountants, cost recovery accounting means gaining back the value of an expense. Accountants do this mainly through depreciation; using depreciation tax law to minimize the taxes paid, thus increasing final profit for the firm. These accountants study tax law to find the rules which result in the greatest benefit for their employer. Ultimately, a tax law expert will be the best at achieving this goal.
Cost Recovery Example
Dee is a tax accountant for a fortune 500 company. Unlike where many accountants deal with the everyday expenses, projects, and various operations of of the business, she does not. Dee has one focus: optimizing cost recovery deductions by minimizing the tax expense of her company. She is a tax accountant and loves to save her firm money.
Now, Dee is working on the cost recovery model of depreciation. She understands the laws well and follows a strict system to assure that she is processing company records properly. Dee is a creature of habit.
At a networking event, Dee heard about a tax law change that just happened this month. Even though she has done a great job so far, she wants to use this to make even more profit for her employer. After the event, she rushes back to work to see what value she can create.
Dee finds that she can save the company $1,000,000. If she had not heard of the recent change, this large sum of money would have been lost. These kind of thing happens all the time. Tax law generally stays the same but often a small change occurs to the statute. In this case, the small change caused big results for Dee and the business she works at.
After saving the company, Dee receives a big promotion and raise. In her field, she is an expert. Though a creature of habit, Dee can change when she needs to. She has shown it through this achievement. As she moves forward, Dee will continue to keep track of tax law to make sure she can do the best job possible.
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