This chapter contains the following section:
The following terms are used in this module.
Ad Hoc Depreciation rates
Depreciation rates that do not default from the Product but are defined at the contract level at the time of input of the asset.
Book Value
This indicates the value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.
Capitalisation
When a business purchases assets like furniture, machinery, equipment, etc. they get posted to the balance sheet as "fixed assets". For financial statement purposes, these assets have "lives" and usually last for years. For this reason, they are not expensed. Instead they are capitalized (shown as assets on the balance sheet) and depreciated. Each year the company records depreciation on these assets to show that it is using them over time.
Depreciation
Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion or other such factors.
Purchase Order
A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services.
Rate over Period
For calculating depreciation for the first year the company can mention a depreciation rate that is different from the depreciation rule that has been specified. This is mentioned as a part of the Rule definition.
Residual Value
Residual Value is the scrap value of the asset which can be realized when the asset is sold after its useful life is complete.
SLM
The simplest and most commonly used, straight line depreciation is calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the company [called “useful life” in accounting jargon].
Purchase price of asset – approximate salvage value
Estimated useful life of asset
Under straight line method, a fixed percentage is applied on the original cost of the asset, thereby ensuring that the depreciation per annum over the useful life is constant.
Transfer Value
This indicates the value of the asset when transferred from one branch to another.
Useful Life
This indicates the life of the asset. i.e. the period for which the asset would be useful for the organization.
WDV
Under written down value method, a fixed percentage is applied on the written down value (original cost less depreciation charged till the end of the previous year) of the asset. This results in higher depreciation in the earlier years and lesser depreciation in the later years.
Normally the depreciation rate under written down value is higher than the rate under straight line method. This ensures creation of depreciation provision over the useful life of the asset.
WIP
Work that has not been completed but has already incurred a capital investment from the company. This is usually recorded as an asset on the balance sheet. Work in progress indicates any good that is not considered to be a final product, but must still be accounted for because funds have been invested toward its production.
Write Off
This indicates a reduction in the value of an asset or earnings by the amount of an expense or loss.