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Assets / Enterprise Assets / Depreciation
Depreciation Concepts
This topic overviews the concept of depreciation and shows how a particular asset is depreciated using the four standard depreciation methods supported by Archibus.
What is Depreciation?
As an asset ages, it typically becomes less able to provide service, and therefore its monetary value decreases. Since an item has a specific depreciation period (also known as a service life), accounting practices call for expensing the cost of an item over its depreciation period, such that a portion of its cost becomes an expense for each of the months in the depreciation period. For example, if an item has a depreciation period of 10 years (120 months), and costs $12,000.00, depreciation principles call for debiting $100.00 as a depreciation expense for each month of the 120 months.
In addition to calculating each month's depreciation expense, you can track an asset's accumulated depreciation and current value.
There are three ways to provide the depreciation value:
- have Archibus to calculate it, as described in the following topics
- use the Connectors to import an existing value into the Equipment (eq) or Tagged Furniture (ta) tables
- manually enter the depreciated value in the eq or ta tables using Smart Client (in the Web Central forms, the field is read only)
The Assets domain offers three methods for calculating depreciation of tagged furniture and equipment:
- straight-line depreciation
- sum-of-years-digits depreciation
- double-declining balance depreciation
Additionally, if an item appreciates in value (such as a painting), you can calculate its appreciation with the percentage depreciation method. Each of these methods is illustrated below.
Straight-Line Depreciation
This method calculates depreciation expenses by spreading an asset's cost over its depreciation period with equal periodic charges. Straight-line depreciation uses the following formula:
Monthly Depreciation Expense = (Cost Purchase - Salvage Value)/Depreciation Period for Property Type
For example, if an asset is purchased at $1000.00, has a salvage value of $200.00, and a depreciation period of 3 months, the monthly depreciation expense is $266.67; that is, (1000-200)/3.
Double-Declining Balance Depreciation
This method calculates depreciation expenses at an accelerated rate, such that the depreciation expense is highest during the first depreciation period and progressively lower in each additional period.
The basic formula is:
Current Depreciation Expense = (Cost Purchase - Total Depreciation from All Other Periods)*2/Depreciation Period
If Cost Purchase
- Total Depreciation from All Other Periods - Current Depreciation Expense
< Salvage Value, then,
Current Depreciation Expense = Cost Purchase - Total Depreciation
from All Other Periods - Salvage Value
For example, if the depreciation period is 3 months, the purchase price is $1000.00, and the salvage value is $200.00, the depreciation expense for the first month is $666.67. The equation is: (1000 -0)*2/3, as there is no depreciation value from previous periods.
The calculation for the second month uses $666.67 as the total depreciation from all other periods, as shown:
(1000-666.67)*2/3 = 222.22
However, you now must check the "if" condition. Since 1000 - (666.67+222.22) < 200 (the salvage value), the calculation for depreciation expense is:
1000 - 666.67 - 200 = 133.33
Since the calculation for the second period determined that the standard depreciation value is less than the salvage value, Archibus depreciation reports document the depreciation expense for the third period as zero.
Note: For the Double-Declining-Balance Depreciation method, using a depreciation period of over 20 months usually means that at the end of the depreciation period, the asset is not fully depreciated (that is, the current value of the asset will be greater than the salvage value). In general, the longer the depreciation period, the greater the difference between the current value and the salvage value will be at the end of the depreciation period.
Sum-of-Years Digits Depreciation
With this method, depreciation expenses steadily decline over the depreciation period because a successively smaller fraction is applied each month to the asset's purchase price minus its salvage value.
Note that although the name of this method implies that you sum the digits of an asset's years of estimated life, Archibus calculates depreciation by summing the digits of an asset's months of estimated life.
The basic formula is:
Current Depreciation
Expense = (Cost Purchase - Salvage Value) * Remaining Useful Life
Remaining Useful
Life = Number of Remaining Months of Life/Sum of Digits Representing Depreciation
Period
For example, if an item has a depreciation period of 3 months, then the denominator is 6; that is, the sum of the digits prior to and including 3 (3+2+1). In the first period, the number of remaining months is 3; therefore, the formula and calculations are:
Current Depreciation Expense = (Cost Purchase - Salvage Value) *3/6 (1000 - 200) * 3/6 = 400.00
In the second month, the number of remaining months is 2; therefore, the formula and calculations are:
Current Depreciation Expense = (Cost Purchase - Salvage Value) *2/6 (1000 -200) * 2/6 = 266.67
In the third month, the number of remaining months is 1; therefore, the formula and calculations are:
Current Depreciation Expense = (Cost Purchase - Salvage Value) *1/6 (1000 -200) * 1/6 = 133.33
Percentage Depreciation
This method uses a yearly percentage to calculate depreciation which is not compounding. This is typically used for items that appreciate, such as a painting. For example, an appreciation percentage of 10% means a $100 item is worth $110 after one year. The basic formula is:
Current Depreciation = - (Cost Purchase * (Appreciation Percent / 100 ) ) / 12
Accumulated Depreciation = Months Between Date Received and Report * Current
Depreciation
Notice that the formula includes a negative ( - ) because it calculates appreciation and a negative depreciation amount indicates appreciation. The formula's Appreciation Percent is the value stored in the Depreciation Period or Appreciation % field of the Depreciation Property Types table. See Defining Property Types.
For example, if an asset is purchased at $1000.00 and its Depreciation Property Type has a value of 5% for the Depreciation Period or Appreciation % field, its current depreciation is:
Current Depreciation = - (1000* (5/100)
)/12
Current Depreciation = - 4.166
If the asset is 3 months old, the accumulated depreciation is:
Accumulated Depreciation = 3 * (-4.166)
Accumulated Depreciation = -12.498
Therefore, its total worth is now $1012.49 (original price minus its accumulated depreciation).
Note: The Tagged Furniture and the Equipment tables do not use the same fields
to represent an asset’s receipt date and an asset’s original cost; the
Tagged Furniture table uses Delivery Date and Purchase Price, and the Equipment
table uses Install Date and Purchase Price.
In order to use one set of calculations for depreciation
of all types of assets, AssetService.java (the Java code that calculates
depreciation) assigns these different fields to Date Received and Cost.Purchase. Accordingly, the above explanations of the calculations use
these terms rather than the actual field names of the Furniture or Equipment table. Advanced users can consult AssetService.java for more information.