The app automatically calculates the daily depreciation of all assets within each asset class. The total depreciation of each class is then posted, debiting the depreciation expense and crediting the accumulated depreciation of the asset class.
For depreciation calculation, the app offers two methods: straight line and diminishing value. It is advisable to select one method based on your accounting policies to ensure consistency. You can make this selection in the asset register updating form.
Under the diminishing method, annual depreciation for assets starts on the 1st day of each financial year. In the case of an asset migrated from a previous ERP system, its depreciation under the diminishing method begins from the date of migration into this app. This is also when the original cost and accumulated depreciation values were migrated. It's worth noting that the depreciation commencement date recorded in the asset register is historical. However, for calculating depreciation using the diminishing method, this date is only applicable for the initial year of asset acquisition.
The straight-line depreciation method is a commonly used approach to determine the depreciation expense of an asset over its useful life. Under this method, the asset's cost is evenly allocated over the estimated number of periods of its useful life. This results in the depreciation expense being the same amount each period. The formula to calculate the straight-line depreciation is:
Depreciation Expense = (Asset Cost - Salvage Value) / Useful Life
Where:
- Asset Cost is the initial cost of the asset.
- Salvage Value is the estimated value of the asset at the end of its useful life.
- Useful Life represents the number of periods (years, months) over which the asset is expected to provide value or be used.
The "diminishing value method" is also known as the "diminishing balance method" or the "double declining balance method" of depreciation. It is an accelerated depreciation method that is commonly used to calculate the depreciation expense of an asset.
Under the diminishing value method, the asset's cost is depreciated by a fixed percentage, typically twice the straight-line rate, over its useful life. This means that the asset is depreciated at a faster rate in the earlier years and the depreciation expense gradually reduces over time.
The formula to calculate the depreciation expense using the diminishing value method is as follows:
Depreciation Expense = (Asset Cost - Accumulated Depreciation) x Depreciation Rate
The depreciation rate is usually expressed as a percentage, and it is applied to the net book value (asset cost minus accumulated depreciation) to determine the yearly depreciation amount.
It is important to note that some entities may use different names or variations for the diminishing value method, but the principle remains the same – faster depreciation in the early years and a decrease in depreciation over time.