The Ledger : depreciation

The Straight Line Breakdown

Haley Campbell — Fri, 02 Oct 2009 12:23:00 GMT

Straight line depreciation is one of the most common methods used when depreciating assets. Have you ever wondered about the list of conventions, and what they mean, and what they do? I hope these explanations help you understand which depreciation convention is right for your assets!

Full Month

Depreciation begins with the first month in service
Equal depreciation amount every month, determined by the total number of months in service
Continues throughout useful life

Mid Month:

If the date in service is before the 16^th, a full month's worth of depreciation calculates the asset's first month
$0 is charged in the first month if Date in Service is after the 15^th

An ‘extra' month is added to the asset's useful life to compensate for the amount not charged in the first month of life.

Zero Month:

No depreciation is calculated in the asset's first month in service
Beginning with the second month, depreciates like Full Month convention

Full Year:

An entire year's worth of depreciations calculates in the first year, regardless of the month in service date.

During the first year, the annual depreciation will be distributed over the number of periods in service for the first year. Example: If the asset is placed in service in the third period, then the first year's depreciation will be evenly distributed between periods three through twelve.

After the first year, the asset will depreciate in the same manner as Full Month.

Half Year:

One half of a normal year's depreciation will be depreciated in the first year.

The actual amount of depreciation will be distributed over the number of periods the asset is in service during the first year.

Beginning with the second year, a full years' depreciation is taken
Continues until the last year, when an additional half year's depreciation is taken. This is like the Half Month convention we discussed earlier. The additional year is added to compensate for the half year skipped in the beginning of the asset's life.

Zero Year:

Just like Zero Month, no depreciation is calculated in the first year of service
In the first period of the asset's second year, depreciation will begin calculating in the same manner as Full Month.

Adjusting the Depreciation Basis of an Asset

Geoff Sharbrough — Tue, 01 Sep 2009 19:31:00 GMT

So your organization just got a brand new vehicle or other asset and you want to record this in The Financial Edge. However, there is still some information that you do not have about the asset, such as how you want to handle the depreciation basis or depreciation amount. While I recommend having all information at the time of entering an asset, you can still enter the asset without knowing all of the vital depreciation information. It would be beneficial to not calculate the depreciation until this information is known, but it can be changed even if it is calculated.

Now that you have the information a few months later, or you realize the method originally defined was incorrect, it can be changed by deleting any existing depreciation transactions from the asset record. If the transactions were posted, reversing entries will post to the General Ledger. Keep in mind any soft-closed fiscal periods when posting your reversals though! Once you have posted the deleted depreciation transactions, you can then go back and adjust the depreciation basis of the asset. Then simply re-calculate your depreciation transactions, and you’re done.

Hope this helps with your new purchases!

Depreciation Years

Karen Badham — Wed, 17 Jun 2009 15:59:00 GMT

Understanding your depreciation years is important to ensure accurate asset depreciation. When you create your Depreciation Year in Configuration, you define the time frame for the accounting cycle and the number of periods that make up the cycle for the life of the asset. Each depreciation year can be whatever you want; they do not have to follow the fiscal or calendar year. Without a depreciation year, FA doesn't know how to spread out the asset cost and depreciation will not calculate.

It is integral to plan out how you want to depreciate an asset and create the depreciation year accordingly. For example, if you create your depreciation year to match the calendar year, but you want your depreciation to follow your fiscal year it will not. Your depreciation will calculate incorrectly causing incorrect reporting.

Another reason to plan out your asset depreciation is once you start creating asset transactions within a depreciation year, the year can no longer be edited. For example, if there is an asset transaction in 2009, but not in any other year, the 2009 depreciation year can no longer be edited.

I hope this helps you understand your depreciation years!