Work with any property is associated with wear and tear and sooner or later leads to the loss of the original properties of objects. The main assets become unusable, equipment characteristics deteriorate, therefore, the replacement cost of the resources that are in operation decreases as their technical condition changes.
The process of forming a financial fund to cover depreciation of the production reserve becomes depreciation. Methods of calculating depreciation are determined by Regulation 6/01 on the basics of accounting for fixed assets.
The importance of depreciation
The depreciation procedure is the alternate transfer of the value of capital goods, property having a limited production period and useful properties to a second-hand product.
Depreciation is performed monthly and separately for any fixed assets owned by the company. The purpose of these transfers is the upcoming change or modernization of resources at the time of their complete depreciation.
The question of the size of depreciation charges is very significant. First, these charges are included in the list of expenses of the organization, therefore, increase or decrease financial results. Secondly, charges become the main financial reserve for the rehabilitation of resources that have become unusable.
Hence, the definition of methodology depreciation charge will affect the tax base and the financial turnover of the company. What are the ways to calculate depreciation?
Three damping whales
Depreciation of fixed assets, production assets is carried out from the 1st day of the month following the month of their accounting. Deletion from the register is accompanied by a stop of accruals on the 1st day of the month following the month of deregistration. Along with the disposal of the reserve, deduction also ceases.
Reconstruction, conservation for more than 90 days, overhaul or modernization (more than a year) require a halt in charges. The above fundamentals are elementary, usually not violated and do not depend on which calculation method is used.
Accrual method depreciation rate and the calculation procedure is not clear every time, but other situations raise questions from management. For example, depreciation of reserves used in uneven production by season. In this option, damping is the same during seasonal work.
Depreciation Methods
The calculation of the damping fund of fixed assets is done monthly and individually for any object. Payments made on a monthly basis are simple: divide the total deductions for the year by the number of months. Depreciation for a one-year period is calculated using one of the options.
| The main methods of depreciation | |
| Accordingly, paragraph 18 of PBU 6/01, owners apply: | According to Chapter 25 of the Tax Code, the owners apply: |
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We can’t ignore the moment, tax legislation actually prohibits immensely the use of non-linear methods for calculating depreciation. It is possible to freely take on arms exclusively linear and deduction of the reduced balance with doubling the rate.
The existing damping systems are practiced by both legal entities and individual entrepreneurs.
Linear accrual system
The linear method of depreciation is a calculation based on the replacement cost and time of use of the asset. The value of the capital object is uniformly carried over the entire operational period. Norms are regulated by a classifier that takes into account operational terms.
| Linear depreciation method | |
| Agod = Cact / T | Agod - a set of depreciation charges for the year;
Сact - the cost of equipment; T - operational period. |
The duration of the operation phase of the equipment put on balance, the owners select on their own. When the period is not established by technical conditions or approved by management, then the following are taken into account:
- operating restrictions regulated by regulatory documents;
- projected period of fund application, planned performance indicators;
- predicted depreciation as a result of compliance with the operating mode.
| Linear depreciation method. Formula | ||
| Damping rate
taking into account the operation stage (At) |
Amount of damping for a year (Agod) | Amount of damping per month (Ames) |
| At = 100 / T.
On - standard; T - operational period. |
Agod = (Cact × NA) / 100
Сact - replacement cost of equipment. |
Ames = Agod / 12 |
Pros and cons of linear damping
The linear method of depreciation is indispensable in the depreciation of buildings, non-production equipment. He is distinguished by his strengths and weaknesses.
| Positive features of the method | Disadvantages of the method |
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Accounting functions are greatly simplified through the use of average standards in calculating depreciation. The method of linear accrual is more convenient to adopt in multidisciplinary corporations. Such companies are characterized by a peak set of fixed assets, along with this the contribution of a single asset is small. What depreciation methods solve linear settlement problems?
Accelerated Depreciation Technique
The method of reducing the balance (accelerated damping) is a non-linear method of calculating depreciation according to the information on the residual value of the beginning of the period, rate and coefficient. The latter is chosen by the company, but it is required that it does not exceed 3.
The technique is taken into service for the most part when calculating damped amounts for rapidly wearing outdated equipment. It helps to eliminate the weaknesses of the linear. With its help, it is possible to return up to 75% of the cost of all resources involved in the core business for only half the period of their functioning. Due to the linear calculation, only 50% will return in the same time.
The method of reducing the balance of depreciation is used in two ways.
| 1 method | 2 method |
| To write off the value of the object before the end of the operational period, the standard will have to be increased step by step, annually. We are looking for the norm by the linear method and in the end we bring it to 100%. | The second method (the technique of doubling the reducing residue) lies in calculating the double norm. Finally, the residual value is written off in the last year. |
| The value of the annual damping (Ag):
Agod = (Сact - Of) × NA / 100 Сact - the value of the object; NA- damping standard; Depreciation of the asset at the beginning of the year. |
The value of the annual damping (Ag):
Agod = (Сact - Of) × 2НA / 100 2HA - depreciation rate multiplied by 2. |
Annual Summation Technique
The method of summing annual numbers (cumulative) helps to implement the procedure for allocating equipment based on replacement cost, the number of years until the end of the operational period. For calculation, a figure is taken, formed by adding the serial numbers of each year of useful use. Ultimately, equipment value, depreciation, and application time affect how depreciation is calculated. Depreciation methods involving other methods make it impossible to make up for depreciation so quickly.
| A = (T - n + 1) Cact / Ʃ
T - period of useful use n - year number Сact - replacement cost Ʃ - the sum of all years of the asset’s life |
This calculation makes it possible to write off over 3 years up to 80% of the cost of acquiring equipment. Replenishing the lost assets in a short period of time, the company becomes able to quickly acquire new ones. So, the annual number method insures the company against losses and significantly reduces the risk of depreciation of obsolete assets.
Production method
In the production method, the damping value is calculated based on the natural indicators of production volumes. The method is applicable in factories where they write off equipment that produces a certain volume of product (vehicles limited by mileage).
The calculation is made when taking into account the volumes of the produced product for the period.
| Agod = V × Cact / Ʃv
B - machine productivity for the reporting year Сact - the cost of the machine Ʃв - total productivity for the entire duration of work |
Linear calculation example
It is very important to consider practical ways of calculating depreciation, examples of damping by the linear method. In order to calculate linear depreciation, you need to know the cost of equipment and the rate of damping.
| It is known: | Accrual Stages: |
| The value of equipment = 233,680 p.
The operational period is 5 years. Regulatory group - 3. |
1) Define the annual percentage of obsolescence:
100% / 5 = 20%. 2) Damping for the year: 233 680 × 20% = 46736 p. 1) Damping per month: 46736/12 = 3895 p. |
Non-linear damping examples
Non-linear methods of depreciation, examples of calculations empirically, we will first consider the method of decreasing balance. The use of this method of calculation is associated with the establishment of depreciation of equipment at the residual value obtained after deducting the accruals of previous years. The company has the right to choose obsolescence standards and coefficients, but the value of the acceleration coefficient is required in the range of up to three.
| Given | Accrual Stages: |
| The cost of equipment = 233 680 p.
The work period is 5 years. Acceleration coefficient = 1.5. |
1) Damping for 1 year:
233,680 × 20% × 1,5 = 70,014 p .; 2) Damping 2 year: (233 680 - 70104) × 30% = 49073 p. 3) Damping 3 year: (233,680 - 70104 - 49073) × 30% = 34351 p. 4) Damping 4 years: (233,680 - 70104 - 49073 - 34351) * 30% = 24045 p. 5) Damping 5 year: (233 680 – 70104 – 49073 – 34351 – 24045) * 30% = 16832. 6) The volume of depreciation for five years: 70104 + 49073 + 34351 + 24045 + 16832 = 194405 p. 7) 233 680 - 194405 = 39275 p. The amount indicates the liquidity of the equipment. |
Non-linear depreciation. Methods for calculating depreciation using the annual number method
| Given | Accrual Stages: |
| The cost of equipment = 233 680 p.
The period of work is 4 years. Acceleration coefficient = 1.5. |
1) The sum of the annual numbers of the period of work:
1 + 2 + 3 + 4 = 10. 2) Damping for the 1st year: (233 680 × 4) / 10 = 93472 p. 3) Damping for the 2nd year: (233,680 × 3) / 10 = 70,014 p. 4) Damping for the 3rd year: (233 680 × 2) / 10 = 46736 p. 5) Damping for the 4th year: (233 680 × 1) / 10 = 23368 p. |
Methods for calculating depreciation of intangible assets
Intangible assets are carried at residual value. All of them have their own operational period. When licensing, patenting, the contract becomes an informant to find the operating time.
Sometimes the operating period is difficult to establish, and rely on standards for depreciation.The period cannot be longer than the time the company operates (up to a maximum of 20 years).
For AT, the same damping options are suitable as the methods for calculating depreciation of fixed assets. Damping is not carried out for NA donated, privatized and purchased with earmarked funds from the state.
Depreciation methods - formulas - are used in practice the same for ON one group. Deductions make the entire operational period, and stop after the conservation of the facility.
Conclusion
The depreciation contributes to the transfer of depreciation of equipment and other production facilities to the result of the company’s work. The depreciation methods contain features, and any company dwells on a more suitable system for the recovery of obsolete assets.
The choice of method is determined by the profitability and efficiency of the production system. To cover the obsolescence of intangible assets, the same methods are used as the methods for calculating depreciation of fixed assets.
