A lot of materials have been written about how depreciation of fixed assets is correctly reflected in the balance sheet, and it is not surprising, because in many respects the correctness of the organization’s reporting depends. Proper preparation of documentation allows analysts to form an accurate picture of the financial situation in the company, which, in turn, serves as the basis for making the right management decisions.
We do not lose sight of anything!
Correctly reflected depreciation of fixed assets in the balance sheet allows you to accurately understand how large the profit of the organization, how large amounts need to be included in the report. It depends on what results the financial analysis will show, on the basis of which it will be possible to draw conclusions about the profitability of the enterprise. In addition, the depreciation of fixed assets in the balance sheet is a significant factor. The organization’s financial leverage pretty much depends on this.
Why is it so important how correctly depreciation is reflected in the balance sheet? The relationship is as follows: balance sheet information allows us to draw conclusions about how solvent the organization is. And it will be correct only if depreciation in the balance sheet, which accompanies the recapitalization of part of the company, is correctly entered into the statements.
General Provisions
The issues of the correct accrual and reflection in the depreciation balance sheet were considered in the materials published by IFRS. From these publications it follows that depreciation is an accounting process. Its main task is to identify the useful life of the operating system, to distribute the price of the operating system for this period. The concept of depreciable object in these fundamental materials explaining where in the balance sheet depreciation is based on assets, an assessment of their significance. From the point of view of experts, assets are what a firm sees as a method of making a profit in a given time period.
Analysts have suggested breaking down objects to be studied into components for a more accurate depreciation estimate. This made it possible to achieve higher accuracy of calculations. In this case, a separate component should be separately depreciated if the price for it is quite significant relative to the total cost. In some cases, such an approach cannot be used, but if its use is real, then it becomes mandatory. However, this does not mean that the assets of the company should be divided, at least in a situation where there is no particular significance for the indicators reflected in the reports.
Where do we start?
As follows from the mentioned IFRS document, first of all, the company makes a decision in favor of choosing a specific amount - the initial price of fixed assets. The choice is made taking into account the significant components, of which each will be accrued depreciation in the balance sheet.
Example: if you need to consider an airplane, it can be divided into seats and a casing, a ventilation system and engines. For each individual component derive its own life. For this period, depreciation is charged. In the balance sheet, the line reflects indicators not for this component, but for the entire object as a whole, that is, for the aircraft. It is recommended to apply this procedure both in the case when all components and the object as a whole are the property of the company, and when drawing up a lease agreement, in which the object is listed on the balance sheet of the real owner, and not the tenant.
Separate story
A situation is possible when there is a certain OS object, divided into several components, and the analysis for each of them shows the same time intervals to reflect depreciation in the balance sheet, and the theory recommends using the same calculation methods. With such a coincidence, a grouping of similar objects is allowed. The period of operation of the facility depends on:
- from the time interval planned by the company for the use of the facility;
- from the number of production units similar to those planned to be received during the operation of the facility.
Together? Separately?
In the case when it was decided to reflect depreciation for the components of the asset object (balance sheet item: OS = D 01 - K 02) separately, then a similar approach should be practiced with other parts of the asset that include elements that do not actually exist.
According to what scheme amortize such residuals? To do this, first analyze the consumer mode, evaluate the approximate life of all the components of the OS object. The company has the right individually to deal with the depreciation of components, whose initial price relative to the cost as a whole represents a small amount. At the same time, you need to remember: in fact, you cannot find where depreciation is shown in the balance sheet, since according to accounting rules, in line 120, you need to enter the value from which depreciation indicators have already been deducted.
Accounts, depreciation, rules: how does it work?
Another important point related to which line of the balance sheet depreciation is reflected, and where there should be no mention of it. Any organization adopts an accounting policy. For its formation, the chief accountant of the enterprise is usually responsible. In accounting policies, it is necessary to clarify by which method depreciation is calculated. This document consolidates the approach to the issue and regulates the accumulation of depreciation in the balance line, which reflects 02 credit on the account.
In general, a correctly completed balance sheet, as already indicated above, does not directly reflect the amounts accrued as depreciation. Instead, assets are entered in the balance sheet only as balances after deduction of depreciation values. Account 01 is responsible for the initial price of the objects, and loan 02 indicates what will remain after depreciation. The balance sheet also contains an indicator of the difference between accrued depreciation and the initial price. This value is entered into the account balance 02. Line No. 1150 is intended for this. The described principle was not put into application by chance. As a rule, people for whom financial statements are intended are interested in seeing how large the assets are in reality at any given moment in time.
Accounting and Report
Where is depreciation reflected in the balance sheet? In fact, it is recorded on account 02, but is not reflected directly. The parameters of this account are such that it is considered regulatory. This means that the account has no independent value. This status imposes certain restrictions: it is allowed to use the material only if there is data from account 01, that is, the main one. It is on it that you can find what the value of the object was at the beginning, further reduced by the amount of depreciation.
A separate group of assets - intangible - cannot be reflected in account 01, the 4th is intended for it. In general, the logic of calculating and reflecting changes is similar here, and depreciation in the balance sheet is shown by account 05, where you can see how big the depreciation charged on the funds was. At the same time, it is not possible to directly see depreciation on the balance sheet. The data obtained in the course of accounting calculations are not recorded on their own, since it is necessary to reflect the assets in the balance sheet, depreciation is not such, but it is important in determining the cost and determining the costs associated with the production process.
Costs and depreciation
The price of a product manufactured by a company directly depends not only on the materials invested, but also on the depreciation of the property of the company at the final cost. Proceeding from this, in order to form expenses correctly, it is necessary to evaluate the distribution costs, as well as the movement of funds on accounts tied to the main production processes. These are accounts under numbers 20, 26, 44. All of them are accounting entries and allow you to make an assessment and reflection of depreciation in the balance sheet, albeit not directly. Information is placed on the expense accounts DT 20, 26, 44, as well as KT 02.
Costs: fixed, variable, indirect, direct
What will be the depreciation, very little depends on production volumes and their changes. This allows attributing depreciation charges to constant expenses. The company decides in favor of a specific methodology for calculating funds and monthly takes into account the same amount. This means that when you release hundreds of units of the product for depreciation, the deductions make the same as releasing a thousand pieces.
According to the laws of our country currently in force, entrepreneurs are not limited in where and how to allocate costs. If you wish, you can qualify a specific article as indirect, and call another one direct, you can do the opposite. The 25th chapter of the Tax Code is devoted to this, but there are no specific explanations or rules of work in it yet. A taxpayer can independently make a decision and set up accounting in a way that suits him. In practice, depreciation charges are almost always classified as indirect costs.
How to make friends with the tax?
But when tax specialists come to the company with a check, many of them like to make claims just under this article. The entrepreneur should think in advance of the motivation for the graduation introduced by him, and such that it would satisfy officials. Typically, tax auditors justify their interest by the fact that at any enterprise the costs on which the price of the final product depends are extremely significant, therefore, attributing them to indirect ones is incorrect.
However, the most reliable method of getting rid of too much attention is to work out the accounting policies of the organization. It is possible to introduce paragraphs in it, where to describe the mechanics of the separation of direct, indirect costs. Additionally, it will not be superfluous to economically substantiate the decision made. This will help once and for all to resolve any disputes and doubts about the correctness of the company. In addition, it helps to avoid disagreements within the organization. So, if the depreciation of fixed assets in the balance sheet is reflected as indirect costs, it should be indicated.
Reporting and depreciation
As has been said more than once, in the formation of the balance it does not directly indicate the depreciation of the asset. Nevertheless, a thoughtful leader is usually interested in seeing the amounts allocated by the accounting department - at least for the sake of checking the correctness of the work of accountants. To get acquainted with the calculated indicators, you need to request reports on the financial performance of the enterprise.
In this document, it will be possible to find the amount of depreciation in various lines, this is determined by the characteristics of the activities of a particular organization. Let’s say, there are such enterprises that use fixed assets in the production process according to the main type of work, and they are not involved anywhere else. Then, line 2120 will tell about depreciation, which is dedicated to sales and the cost price. But if the company has assets exploited in trade, then the information can be found in the 2210th line, devoted to the costs incurred by commercial activities.
Special cases
In some organizations, operating systems are used in industries that are additional in nature. As a rule, these are not ordinary species.Some companies transfer assets under a lease, while it is believed that making a profit from the lease is not the main source of income for the organization. Then depreciation will need to be taken into account in the 2350th line of the balance sheet, that is, among other expenses.
Fixed assets can be used for general business purposes. This is allowed if such permission was included in the accounting policies of the enterprise. Amortization amounts for such a company will be reflected in the balance sheet in line 2220.
Theoretical aspects: what are fixed assets?
Of course, the question of reflecting the depreciation of fixed assets on the balance sheet of the enterprise in the statements generated by accountants is clear. But what, in principle, should be attributed to fixed assets, and what cannot be assigned to this category?
OS - these are the values and property of the company that can be used as assets in production. They are needed to produce a product or provide a service, perform work. In addition, it is customary to attribute to the OS also such property as is necessary for the organization to be managed efficiently.
OS is:
- equipment;
- equipment, including computing, measuring;
- building;
- land;
- equipment used in managing;
- cattle;
- planting of perennial plants;
- the roads.
OS - this is capital investment in land, including various works to improve the quality of the territory from the point of view of agriculture. This includes nature management facilities, capital investments made in property received under a lease.
The listed OSs are not a complete list of all those that exist in the entire diversity of companies in our world. In some organizations, you can find quite specific OS. In general, the decision to classify an item as an operating system is made, evaluating how much the property has for production and management processes within the company.
And why do you need depreciation?
When it was decided to classify an object as a fixed asset, the cost is determined for it. From quarter to quarter, it becomes less by an amount defined as depreciation. Initially, an object is decided on how long the operational period is. Throughout this period, the reporting for each new quarter will contain updated indicators of the value of property classified as fixed assets.
Depreciation is calculated regardless of how large the profit of the organization, as well as the loss. Key concepts are the length of the reporting period and the established depreciation indicators for a particular asset. But the way depreciation charges are reflected in the financial statements depends on the method chosen in the accounting policy. Some companies use a linear way of reflecting data, while others set a write-off of cost, depending on the time, proportional to the volume of goods produced by the company. You can also reduce balances.
Rules and Exceptions
The OS can be attributed only to those for which the operational period exceeds 12 months, and the initial price is more than 40 thousand rubles. In addition to fixed assets, intangible assets can be amortized. Depreciable assets are capital investments aimed at making a profit. Some of them are additionally associated with lease agreements, and transfer to free use is also allowed.
But there are some exceptions to this rule (as well as to almost any). For example, if we are talking about a unitary enterprise, then depreciation will have to be charged on any property transferred by the owner to an economy or as an operational manager.
If there is a certain company that has found an investor for itself, then the property transferred by this person to the organization should be depreciated by the investor.This process is regulated by the investment agreement concluded at the beginning of cooperation. Depreciation from the investor is charged only during the period that the agreement is in effect.
Natural resources, land, goods - objects for which depreciation is not charged. It is not necessary to calculate it for securities, as well as for capital construction projects, work on which has not yet been completed.
Finally, there are operating systems that are not recognized as depreciable. For example, if municipalities and state bodies do not participate in the transaction, then it is impossible to call the depreciable fixed assets transferred for gratuitous use.