Understanding Depreciation

Aug 19 2015


Businesses use fixed assets such as plant, property and equipment in generating revenues and as infrastructure for the business. Fixed assets are not charged to the profit and loss account rather they are reported on the balance sheet and they stay on the balance sheet.

The purpose of depreciation is to charge an element of the fixed assets annually to the profit and loss account to reflect the usage of the assets during the year. It allows the cost of the asset to be spread so that it is written off against the profits of several years rather than just the year of purchase. Depreciation will continue to be charged to the profit loss account until the carrying value of the fixed assets have been fully depreciated that is if the net book value of the fixed asset becomes zero. Depreciation should cease once the net book value or carrying amount of a fixed asset becomes zero.

There are a number of different methods which can be used to calculate depreciation, which over time will enable approximately the same amount to be depreciated, however, the annual depreciation amount could differ significantly dependent on the method used. Key types include:

• Straight line – where the same amount of depreciation is charged evenly over its useful life.

• Declining balance – An accelerated method of depreciation with a higher depreciation expense in the earlier years of ownership.

• Sum of the years’ digits – where annual depreciation is calculated by multiplying the asset’s depreciable cost by a series of fractions based on the sum of the asset’s useful life digits.

Real Asset Management offers a specialist asset register which caters for all asset types and is a fully customisable depreciation software tool. Organisations can choose to consolidate multiple registers for group reporting purposes and can concurrently maintain discrete financial information.

To learn more about how RAM can assist your organisation in managing fixed asset depreciation, please contact us today at solution@realassetmgt.co.uk or call on +44 (0)1689 892 137.