Preconfigured Depreciation Methods
The Fixed Assets Management SuiteApp automatically sets up some of the most common depreciation methods upon installation.
To view the preconfigured depreciation methods, go to Fixed Assets > Setup > Depreciation Methods. The Depreciation Method List shows the depreciation method name, description, and formula. The following depreciation methods are available:
-
150DB
-
200DB
-
250DB
-
25% Reducing Balance
-
4–4–5 Calendar Depreciation
-
Asset Usage
-
Capital Allowance Year 1
-
Capital Allowance Year N
-
Fixed Declining
-
Straight Line
-
Straight Line Remaining
-
Sum of Years/Straight Line
-
Sum of Years Digits
-
Zero Depreciation
The following depreciation methods, specific for Nordic countries and Benelux, are also available:
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30% Declining Balance
-
25% Declining Balance
-
24% Declining Balance
-
20% Declining Balance to 12% Declining Balance
-
20% Declining Balance
-
15% Declining Balance
-
14% Declining Balance
-
12% Declining Balance
-
10% Declining Balance
-
6% Declining Balance
-
4% Declining Balance
-
2% Declining Balance
The following depreciation methods, specific for Japan, are also available:
The Final Period Convention for Japan depreciation methods is set to Value Based to extend the depreciation beyond the asset's life. Assets are marked Fully Depreciated if the Current Net Book Value equals 1 JPY. This doesn't apply to Japan Special Depreciation.
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Japan Straight Line
-
Japan 250% Declining Balance
-
Japan 200% Declining Balance
-
Japan Old Straight Line
-
Japan Old Declining Balance
-
Japan Special Depreciation
For Japan depreciation methods, you must set the Residual Value to 1 JPY on your asset record to ensure the depreciation amount is calculated correctly. When calculating depreciation, the residual value is deducted from the last year’s depreciation amount. If the Depreciation Rule is set to Pro-rata, asset's won't depreciate until the end of their life. Instead, the asset continues to depreciate until it reaches its residual value.
You can use annual depreciation methods, like 150DB and 200DB, to generate depreciation journal entries. For example, you can create asset types with 150DB and 200DB as the default accounting method, which will be carried over when an asset is created.
Some of these methods are described in more detail in the following topics.
Asset Usage (Asset Activity) Depreciation
Usage-based depreciation methods aren't based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, you estimate its life based on this activity level. Assume a vehicle is expected to go 50,000 miles in its lifetime. You'd calculate the per-mile depreciation rate as:
($17,000 cost - $2,000 salvage value) / 50,000 miles = $0.30 per mile
Each period, the depreciation expense is then calculated by multiplying the rate by the actual activity level.
Calculating Units-of-Activity Depletion:
-
Depreciable Cost divided by Units in Useful Life = Per Unit Depreciation
-
Per-Unit Depreciation x Units During Period = Period Depreciation Expense
If a truck with a depreciable cost of $80,000 ($90,000 cost, less $10,000 estimated salvage value) and is expected to go 400,000 miles during its service life, the truck depreciates $0.20 each mile ($80,000 ÷ 400,000 miles = $0.20 per mile). The following table shows how depreciation expense is assigned to the truck based on the miles driven each year.
|
Cost |
|
|
|
|
|
|
$90,000 |
|
Year 1 |
110,000 |
× |
$0.20 |
= |
$22,000 |
$22,000 |
68,000 |
|
Year 2 |
70,000 |
× |
0.20 |
= |
14,000 |
36,000 |
54,000 |
|
Year 3 |
90,000 |
× |
0.20 |
= |
18,000 |
54,000 |
36,000 |
|
Year 4 |
80,000 |
× |
0.20 |
= |
16,000 |
70,000 |
20,000 |
|
Year 5 |
50,000 |
× |
0.20 |
= |
10,000 |
80,000 |
10,000 |
Fixed Declining (Declining Balance) Depreciation
Accelerated depreciation methods applies a higher depreciation charge in the first year of an asset's life, with decreasing charges in the following years. This may better reflect the asset's expected benefit over its useful life. Many assets are most useful when they're new. One popular accelerated method is the fixed declining method.
For example, a business has an asset with $1,000 original cost, $100 salvage value, and five years (60 months) of useful life. The following table shows the fixed declining method of depreciation. Book Value at the start of the first year is the Original Cost of the asset. At any time, Book Value equals Original Cost minus Accumulated Depreciation.
Book Value = Original Cost - Accumulated Depreciation
The asset is depreciated until the Book Value equals the Salvage (or Scrap) Value.
|
Book Value |
Depreciation Expense |
Cumulative Depreciation |
Period |
|
$1,000.00 |
0 |
0 |
0 |
|
$962.35 |
$37.65 |
$37.65 |
1 |
|
$926.12 |
$36.23 |
$73.88 |
2 |
|
$891.25 |
$34.87 |
$108.75 |
3 |
|
$857.69 |
$33.56 |
$142.31 |
4 |
|
$825.40 |
$32.29 |
$174.60 |
5 |
Straight Line Depreciation
Straight-line depreciation is the simplest and most often used method. In straight-line depreciation, you estimate the asset's salvage value at the end of its useful life (the period during which it is used to generate revenues), then expense a portion of the original cost in equal amounts over that period. The residual value (or scrap value) is an estimate of the asset's value when you sell or dispose it. The residual value may be zero.
Annual Depreciation Expense = (Cost of Fixed Asset - Scrap Value) divided by Life span
For example, a vehicle that depreciates over five years, is purchased at a cost of US$17,000, with a residual value of US$2000, will depreciate at US$3,000 per year: ($17,000 - $2,000) / 5 years = $3,000 or ($17,000 - $2,000) / 60 months = $250. In other words, you divide the depreciable cost of the asset by the number of years or months of its useful life.
|
Book Value - Beginning of Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value - End of Year |
|
$17,000 (Original Cost) |
$3,000 |
$3,000 |
$14,000 |
|
$14,000 |
$3,000 |
$6,000 |
$11,000 |
|
$11,000 |
$3,000 |
$9,000 |
$8,000 |
|
$8,000 |
$3,000 |
$12,000 |
$5,000 |
|
$5,000 |
$3,000 |
$15,000 |
$2,000 (Scrap Value) |
Sum of Years' Digits Depreciation
Sum-of-Years' Digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method. With this method, annual depreciation is determined by multiplying the depreciable cost by a set of fractions.
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Depreciable Cost = Original Cost - Salvage Value
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Book Value = Original Cost - Accumulated Depreciation
Example: If an asset has original cost $1,000, a useful life of five years and a salvage value of $100, to calculate its depreciation schedule:
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Determine Years' digits. Because the asset has a useful life of five years, the Years' digits are: 5, 4, 3, 2, and 1.
-
Calculate the sum of the digits. 5+4+3+2+1=15
Depreciation rates are as follows:
-
5/15 for the 1st year
-
4/15 for the 2nd year
-
3/15 for the 3rd year
-
2/15 for the 4th year
-
1/15 for the 5th year
-
|
Book Value - Beg. of Year |
Total Depreciable Cost |
Depreciation Rate |
Depreciation Expense |
Accumulated Depreciation |
Book Value - End of Year |
|
$1,000 (Original Cost) |
$900 |
5/15 |
$300 ($900 * 5/15) |
$300 |
$700 |
|
$700 |
$900 |
4/15 |
$240 ($900 * 4/15) |
$540 |
$460 |
|
$460 |
$900 |
3/15 |
$180 ($900 * 3/15) |
$720 |
$280 |
|
$280 |
$900 |
2/15 |
$120 ($900 * 2/15) |
$840 |
$160 |
|
$160 |
$900 |
1/15 |
$60 ($900 * 1/15) |
$900 |
$100 (Scrap Value) |
Straight Line Remaining
This method works like the standard Straight Line method, but calculates depreciation based on the asset's value at the start of the method instead of its original cost. This method is used as a linked method following another method.
Sum of Years/Straight Line
This method uses the Sum of Years' Digits for the first year, then switches to Straight Line for the rest of the depreciation lifetime.
150DB and 200DB
These are standard Modified Accelerated Cost Recovery System (MACRS) methods defined for U.S. tax purposes.
Both methods use two calculations and applies the one with the higher value. The results in faster depreciation early in the asset's life. About one-third of the way through (for 150 DB), the system switches to the second method, transitioning from a curve depreciation pattern to a straight line method.
The formula for the 150DB method is:
((NB-RV)*(1.5/AL))~((NB-RV)/(AL-CP+1))
200DB is the same basic formula but will depreciate faster before switching to straight line:
((NB-RV)*(2/AL))~((NB-RV)/(AL-CP+1))
4–4–5 Calendar Depreciation
The 4-4-5 Calendar Depreciation method computes depreciation daily. When you enable the Use Accounting Period Dates for Depreciation preference in the Fixed Assets Setup page, the generated depreciation history record and journal entry will use the base period's end date.
Formula: 12*((CC-RV)/AL)*(DP/FY)
DP/FY is a pro-rated calculation based on the number of days in a period. In a 4–4–5 calendar, this equals to 28 days for 4 weeks, 35 days for 5 weeks, and 36 days for the last period of the year.
When using the 4–4–5 calendar depreciation method, make sure the asset’s depreciation rule isn't set to pro-rata. The pro-rata rule computes depreciation based on a 30–day month. In a 4–4–5 calendar, the difference between the estimated days and the real period length changes the depreciation amount.
|
Period |
Start Date |
End Date |
DP |
YTD No. of Days |
|---|---|---|---|---|
|
1 |
1/1/2015 |
1/28/2015 |
28 |
28 |
|
2 |
1/29/2015 |
2/25/2015 |
28 |
56 |
|
3 |
2/26/2015 |
4/1/2015 |
35 |
91 |
|
4 |
4/2/2015 |
4/29/2015 |
28 |
119 |
|
5 |
4/30/2015 |
5/27/2015 |
28 |
147 |
|
6 |
5/28/2015 |
7/1/2015 |
35 |
182 |
|
7 |
7/2/2015 |
7/29/2015 |
28 |
210 |
|
8 |
7/30/2015 |
8/26/2015 |
28 |
238 |
|
9 |
8/27/2015 |
9/30/2015 |
35 |
273 |
|
10 |
10/1/2015 |
10/28/2015 |
28 |
301 |
|
11 |
10/29/2015 |
11/25/2015 |
28 |
329 |
|
12 |
11/26/2015 |
12/31/2015 |
36 |
365 |
If you have an asset with a cost of 60,000, to be depreciated in 24 months, the following table shows the depreciation using the formula 12*((CC-RV)/AL)*(DP/FY). Note that FY is equivalent to 365.
|
Transaction Type |
Date |
Transaction Amount |
Computation |
Net Book Value |
|---|---|---|---|---|
|
Depreciation |
12/31/2018 |
2,958.90 |
12((60000–0)/ |
30,000.01 |
|
Depreciation |
11/25/2018 |
2,301.37 |
12((60000–0)/ |
32,958.91 |
|
Depreciation |
10/28/2018 |
2,301.37 |
12((60000–0)/ |
35,260.28 |
|
Depreciation |
9/30/2018 |
2,876.71 |
12((60000–0)/ |
37,561.65 |
|
Depreciation |
8/26/2018 |
2,301.37 |
12((60000–0)/ |
40,438.36 |
|
Depreciation |
7/29/2018 |
2,301.37 |
12((60000–0)/ |
42,739.73 |
|
Depreciation |
7/1/2018 |
2,876.71 |
12((60000–0)/ |
45,041.10 |
|
Depreciation |
5/27/2018 |
2,301.37 |
12((60000–0)/ |
47,917.81 |
|
Depreciation |
4/29/2018 |
2,301.37 |
12((60000–0)/ |
50,219.18 |
|
Depreciation |
4/1/2018 |
2,876.71 |
12((60000–0)/ |
52,520.55 |
|
Depreciation |
2/25/2018 |
2,301.37 |
12((60000–0)/ |
55,397.26 |
|
Depreciation |
1/28/2018 |
2,301.37 |
12((60000–0)/ |
57,698.63 |
|
Acquisition |
1/1/2018 |
60,000.00 |
12((60000–0)/ |
60,000.00 |
If your accounting period is set to Calendar Months, using the 4-4-5 Calendar Depreciation method will compute the monthly depreciation based on the number of days for a specific month.
The 4–4–5 calendar depreciation doesn't support irregular accounting periods. If you want to create monthly depreciation history records and journal entries for an irregular accounting period, you must disable the Use Accounting Period Date for Depreciation preference in the FAM System Setup page. Also, when you turn off this preference, the depreciation uses calendar months. In the 4–4–5 depreciation formula, your DP should match the number of days in a specific month.