Equipment Cost Recognition in Financial Modeling for Equipment Rental Business
I'm building a financial model for a company that primarily generates revenue through renting equipments, like: PBX systems, servers, and switches. I'm unsure how to best account for the cost of this equipments.
For example, let's say the company purchases a PC for $12,000 with a 12-month lease agreement. The rental income on the income statement will reflect the installment payments received from the client. However, I'm unsure whether to:
- Spread the $12,000 cost equally over the 12-month lease term (similar to an expense)
- Depreciate the $12,000 cost over the PC's estimated useful life (traditional depreciation approach)
My concern is that if I use depreciation, it wouldn't be reflected in the Cost of Goods Sold (COGS) section, potentially leading to a misleadingly high EBITDA.
What would be the most appropriate approach for recognizing equipment costs in this scenario?
I also know that some COGS, and even SG&A, have depreciation inside. Maybe should be that the case?
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