Depreciation is a non-cash expense that reduces the value of an asset over time, and is an expense that is often neglected when completing monthly Profit & Loss Reports. The only asset that cannot be depreciated is land, as it has an unlimited useful life.
Where possible, you should try to split the total depreciation for the year to share it evenly throughout the year.
Common methods of calculation are those of:
– Straight Line
– Reducing Balance
Straight Line Depreciation: (Starting Value – Scrap Value) divided by useful life
Example 1: You buy a new computer costing €2,400. You enter the purchase as that of a fixed asset. In order to account for the cost of the purchase you use depreciation to de-value the asset over its useful life. If you consider that the computer’s useful life may be 3 years after which the computer would be worth nothing, then you would divide €2,400 by 3 years = €800 per year. You would write off the depreciation for this item at €800 per year, or €66.66 per month if you want to get truer Profit & Loss reports
Example 2: You buy a company vehicle for €20,000 which you plan to change in 2 years, and would hope to get €15,000 for at that time.
Starting Value €20,000 less €15,000 = €5,000 divided by 2 years = €2,500 each year in depreciation (€208.33 per month).
Reducing Balance Depreciation (Depreciate at a fixed percentage of it’s opening year balance) With this method, the balance will get close to zero, but never reaches zero
Example 1: You decide to re-decorate the office, and invest in new furniture worth €5000. It is decided to depreciate it at a rate of 15% per annum reducing balance.
|Year||Value (Start of year)||Depreciation Amount||Year End Value (Value less Dep’n)|
|2018||5000||(5000 x 15%)||4250.00|
|2019||4250||(4250 x 15%)||3612.50|
|2020||3612.50||(3612.50 x 15%)||3070.63|
|2021||3070.63||(3070.63 x 15%)||2610.04|
|2022||2610.04||(2610.04 x 15%)||2218.53|
|2023||2218.53||(2218.53 x 15%)||1885.75|
You get the idea… the balance reduces by 15% each year.
Your accountant will suggest rates for you to depreciate your fixed assets.
Decide on the time interval you want to depreciate at, i.e. monthly, quarterly, yearly etc, and apply the appropriate amounts as below:
(Listed under the Fixed Asset Original Cost code)
|Depreciation (Listed as an expense)||xxx|
By completing this journal you are reducing the value of the fixed asset by increasing the amount of depreciation applied, and you’re increasing expenses therefore reducing profits.