What is a Depreciation?

Depreciation is the portion of a Fixed Asset consumed over a period due to its use, wear and tear and decay caused because of elements of nature, in process of producing and operating business.

Assets happen to be the part of Capital introduced at the beginning of financial year in a business. Depreciation is one of the most import costs of a business. In accountancy, the capital loss on fixed assets over a period of its use is conserved by way of charging depreciation and when the asset becomes unusable it is disposed off or scraped.

Objectives:

Provision to replace the depreciable assets i.e., Machinery, Plant, Truck and Vehicles etc.
Allocate proper cost of acquisition over the years of assets useful economic life
Appropriate profits
Reflect the true business position

Considerations:

Usually the following points are taken into consideration when estamating the amount of deprecation to be provided.

Original cost of Asset

Estimated working life of Asset

Estimated maintenance repairs and renewal expenses

Estimated scrap or residual value when the assets completes its useful life

Chances of Assets obsolescence due to new inventions

Methods: There are several methods of providing depreciation. The most common are
Straight-Line method

Declining Balance method: Written Down Value method, Double Decling Balance method

Straight-Line method: It is the most common method of determine amounts to be charged to depreciation.

Cost + Erection charges - Scrap Value = Annual Depreciation

Assets Life number of years

Rate of Depreciaton= Annual Depreciation x 100

Cost of Asset + Erection Charges - Scrap Value

If a Vehicle purchased at $5,000, estimated life of vehicle is 5 years and scrap value $ 300

5000 - 300 = 4,700 when devided by vehicles estimated life i.e., 5 years then the amount to be charged to depreciation each years is $940.

Written Down Value method:

In this method depreciation is charged at a fixed rate on the reducing balance of the asset each year. As a result each year the amount of depreciation charged keeps on reducing because

the depreciation is calculated on the written value of asset each year.

Double Declining method:

Under this method depreciation is charged in the same way as it is done under written down value method. The difference between the two is the rate. Under this method the rate of depreciation charged is doubled the straight-line method rate.

SAP FI/CO module with its simple features makes Accountants life easier in Asset Accounting and applying Depreciation.  Use of application steps added with the examples is explained here below with the purpose for learners to exercise practice

Our assumed walking through Example Company here is SPIC.

Asset Accounting

Subsidiary Ledger

Terms – Chart of Depreciation – Copy Germany Char of Depreciation (client 800)

Copy Germany & India (client 000)

Depreciation Areas → Book Depreciation

Income from Depreciation

Costing Depreciation

Group Depreciation

In Books only Book Depreciation will be posted.

Depreciation methods – Straight line method (SLM)

Written down value method (WDV)

Depreciation Keys Rate + Method

i.e. 5% SLM
5% WDV

Posting
Keys 70 Asset Debit
75 Asset Credit

Transaction 100 External Asset acquisition

110 In house production

210 Retirement is revenue (consideration)