Depreciation Accounting for Fixed Assets

Depreciation Accounting

Depreciation accounting is writing off a proportion of the fixed assets to the balance sheet over a period. Most assets are typically depreciated over 3 or 5 years, depending on the type of asset.

An example is that a business purchases a computer for 600. If the company puts it down as an expense in the profit and loss account, the whole 600 is recorded in the profit and loss account. If the item is depreciated over three years using the straight-line method, only 200 will post as an expense each year.

Fixed assets include items like furniture, computers, and machinery that have a useful life of more than one year.

Intangible assets (non-physical items) are also depreciated. Intangible assets included things like patents, trademarks and copyright. For these items, depreciation is likely to be over a much longer period.

Depreciation Accounting Methods

There are two main methods which your business can choose to depreciate the asset:

Once your company has decided which method to use, it is worth using the same process each year. To determine which method to use, you need to look at whether the asset will depreciate quickly to start or lose the same value each year. If you are unsure about which method your company should use, you may need to speak to your accountant.

There are also other methods, but these are the main ones that small businesses use.


Software Depreciation

There are specific software packages to calculate your depreciation. If you are using accounting software, have a look to see if it has the feature, this may save time. We have also developed a depreciation schedule, which you can download and use.

Xero has an excellent asset and depreciation feature. When you set up an asset, you can set the depreciation rate. It will then calculate it for you and post the figures to the accounts. It saves keeping separate records.

How to calculate depreciation

Depreciation CalculatorAre you having problems calculating your depreciation, then why not use one of the depreciation calculators. You will need to know which method you are planning to use, the cost of the assets and the useful life.

There are two calculators for the main methods of straight line and reducing balance. The image to the right shows the straight line method. Enter the value of the fixed asset and number of years to depreicate. The calculator will provide both depreciation per year and month.

Accounting for Depreciation

In your accounting records, when you purchase a fixed asset, you will need to post the value of the fixed asset to the balance sheet in the accounts. On either a monthly basis or annually, you can post the depreciation value to the balance sheet. The fixed asset will then reduce in value over a period.

As with all double entry, there has to be a second posting to the accounts. There is also an expense depreciation in the Profit and Loss account. It will reduce the profit for the year and therefore your tax bill.

Depreciation Accounting Example

Company ABC purchases a new computer costing £498. The computer has a useful life of 3 years, and the company is using the straight-line method.

The monthly depreciation figure is £498 divided by 3 equals £166 per year.

Balance sheet for ABC 1st year

Fixed Asset £498
Accumulated Depreciation £166
Net assets £334

Balance sheet for ABC 2nd year

Fixed Asset £498
Accumulated Depreciation £332
Net assets £166

Balance sheet for ABC 3rd year

Fixed Asset £498
Accumulated Depreciation £498
Net assets £0

As you can see from the above example of depreciation accounting, at the end of the third year, the asset has a value of zero.

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