Depreciation Concepts
The JD Edwards EnterpriseOne Fixed Assets system uses account rules and depreciation rules. Account rules define the association between cost accounts and the related accumulated depreciation and depreciation expense accounts. Depreciation rules define the algorithm that the system applies to the cost of an asset over the course of the asset's life every time that you compute depreciation.
Depreciation rules are the key to asset depreciation. To understand depreciation rules, you need to understand these concepts:
- Cost
The cost for an asset is the focal point of the depreciation equation. The system uniquely identifies each cost for an asset.
- Dates
Depreciation rules are date-sensitive. When you set up depreciation rules, you must specify the dates when the rule is effective.
- Limits and bases
The amount that you depreciate an asset can be subject to limits and bases. The limits and bases might be sensitive to particular dates. For example, the entire depreciation formula might be appropriate to a specific period of time or to a specific portion of the life of the asset.
- Formulas
The depreciation formula might be as simple as a single percentage of the cost that applies to each year throughout the life of the asset. Or the formula might relate to the utilization of the asset. The potential for formula variations is virtually infinite. For example:
Salvage value can be a factor in the depreciation formula.
The formula might provide occasions when the depreciation stops and then resumes.
Multiple depreciation formulas can relate to the same cost, possibly in different years or in different ledgers.
- Apportionment - periodic and cumulative
The system stores the cost apportionments in the Asset Account Balances File table (F1202). The apportionment of the cost over time is stored as a cumulative balance in the accumulated depreciation records. The periodic apportionment of the cost is stored in the depreciation expense records. Each depreciable cost has at least one cumulative record and one periodic record for each year of the life of an asset.
- Reporting years
The reference points in time can be a variable in the depreciation process. For example, a single legal entity might be required to determine and report depreciation according to different patterns of dates. Also, the fiscal years of entities might change.
- General ledger accounts
Each asset balance record is associated with an asset master record. The nature of an account refers to the type of cost. Asset costs are typically classified into categories, such as real property, machinery, equipment, and so on. The balance sheet business unit includes the cost and accumulated depreciation for the asset. For depreciation expense, the business unit might be an operating department, a project, or a location.
- Depreciation accounts
Two accounts are especially important in the depreciation process:
Depreciation Expense - As you compute depreciation for the basis of an asset, the system records the result as an expense of each of the years benefited by the cost.
Accumulated Depreciation - You need to know the original cost of an asset.
The system records the expiration of the cost in an account that can be considered a part of the cost account. This contra account is called the Accumulated Depreciation account.
In some cases, the depreciation mechanism might require multiple accumulated depreciation and depreciation expense accounts.
- Asset account type
The system uses a character code to uniquely identify each asset balance record that is related to depreciation. The character code indicates whether a record is a cost, accumulated depreciation, or depreciation expense. Other accounts that are not related to the depreciation process, but are important to the depreciation equation, such as disposal accounts, are also identified by the system with an asset account type. Asset account type codes enable the system to identify and access specific records easily. Values are:
1: Cost.
2: Accumulated Depreciation.
3: Secondary Accumulated Depreciation.
4: Depreciation Expense.
5: Depreciation Expense - Secondary.
6: Depreciation Expense - Tertiary.
7: Net Book Value - Disposal.
8: Disposal Clearing.
9: Disposal Proceeds.
- Asset
The system associates cost with an asset. You use category codes to classify assets within an accounting category and a depreciation category.
- Annual depreciation amount
The system accesses various depreciation rules for an asset by codes in table F1202. The codes identify depreciation method, computation direction, and so on, for each depreciation rule that you use. Based on the specific depreciation rule, the system calculates depreciation on an annual basis. The system stores the annual depreciation amount for an asset in the associated Asset Balance Accumulated Depreciation record. After the system calculates the annual depreciation amount, it then deals with the initial term apportionment. Any special conventions are applied, based on the options that you define for the specific rule.
- Periodic depreciation journal entries
The annual depreciation amount is subject to spread patterns of percentages that determine how the annual depreciation is to be apportioned to periods within a year. The system applies any conventions that relate to special apportionment during the first, last, and disposal years. The system creates general ledger journal entries based on the rules that are established for each ledger. Based on the account rules, the system updates the Asset Account Balance records for the depreciation expense and accumulated depreciation expense.