Answer / rajesh

HI

WHEN AN FIXED ASSET IS PURCHASED IT HAVING SOME LIFE, WHEN
WE USE THE ASSET THE LIFE IS REDUCE THAT CALLED DEPRECIATION

REASONS ARE WEAR AND TEAR, ACCIDENT, OBSOLENCES ETC.

THERE ARE SO MANY METHODS TO CALCULATE DEPRECIATION


BUT IN SAP ALL METHODS ARE IN DEPPRECIATION AREAS

AS PER INCOME TAX RULES WE FOLLOW STRIGHT LINE METHOD

FOR MANAGEMENT PURPOSE WE FOLLOW WRITTEN DOWN VALUE METHOD

FORMULA FOR STRIGHT LINE DEPRECIATION IS

COST OF ASSET - SCRAP VALUE / LIFE OF ASSET

SO THIS WILL CLEAR TO UR DOUBT

IF NOT SEND THE RIGHT ONE IMMEDIATELY

Answer / noopur

Definition

A non- cash expense that reduces the value of an asset as a
result of wear and tear, age, or obsolescence. Most assets
lose their value over time (in other words, they
depreciate), and must be replaced once the end of their
useful life is reached. There are several accounting methods
that are used in order to write off an asset's depreciation
cost over the period of its useful life. Because it is a
non-cash expense, depreciation lowers the company's reported
earnings while increasing free cash flow.

METHODS OF DEPRICIATION:
There are several methods for calculating depreciation,
generally based on either the passage of time or the level
of activity (or use) of the asset.
Straight-line depreciation
Straight-line depreciation is the simplest and most often
used technique, in which the company estimates the salvage
value of the asset at the end of the period during which it
will be used to generate revenues (useful life), and will
expense a portion of original cost in equal increments over
that period. The salvage value is an estimate of the value
of the asset at the time it will be sold or disposed of; it
may be zero. Salvage value is scrap value, by another name.
Straight-Line Method:

For example, a vehicle that depreciates over 5 years, is
purchased at a cost of US$17,000, and will have a salvage
value of US$2000, will depreciate at US$3,000 per year:
($17,000 - $2,000)/ 5 years = $3,000 annual straight-line
depreciation expense. In other words, it is the depreciable
cost of the asset divided by the number of years of its
useful life.
This table illustrates the straight-line method of
depreciation. Book value at the beginning of the first year
of depreciation is the original cost of the asset. At any
time book value equals original cost minus accumulated
depreciation.
Book Value = Original Cost - Accumulated Depreciation
Book value at the end of year becomes book value at the
beginning of next year. The asset is depreciated until the
book value equals scrap value.
Book Value - Depreciation Accumulated Book Value -
Beginning of Year Expense Depreciation End of Year

$17,000 (Original Cost) $3,000 $3,000 $14,000
$14,000 $3,000 $6,000 $11,000
$11,000 $3,000 $9,000 $8,000
$8,000 $3,000 $12,000 $5,000
$5,000 $3,000 $15,000 $2000(Scrap Value)
If the vehicles were to be sold and the sales price exceeded
the depreciated value (net book value) then the excess would
be considered a gain and subject to the depreciation
recapture rule. In addition, this gain above the depreciated
value would be recognized as ordinary income by the tax
office. If the sales price is ever less than the book value,
the resulting capital loss is tax deductible. If the sale
price were ever more than the original book value, then the
gain above the original book value is recognized as a
capital gain.
If a company chooses to depreciate an asset at a different
rate from that used by the tax office then this generates a
timing difference in the income statement due to the
difference (at a point in time) between the taxation
department's and company's view of the profit.
Declining-Balance Method
Depreciation methods that provide for a higher depreciation
charge in the first year of an asset's life and gradually
decreasing charges in subsequent years are called
accelerated depreciation methods. This may be a more
realistic reflection of an asset's actual expected benefit
from the use of the asset: many assets are most useful when
they are new. One popular accelerated method is the
declining-balance method. Under this method the Book Value
is multiplied by a fixed rate.
Annual Depreciation = Depreciation Rate * Book Value at
Beginning of Year
The most common rate used is double the straight-line rate.
For this reason, this technique is referred to as the
double-declining-balance method. To illustrate, suppose a
business has an asset with $1,000 Original Cost, $100
Salvage Value, and 5 years useful life. First, calculate
straight-line depreciation rate. Since the asset has 5 years
useful life, the straight-line depreciation rate equals
(100% / 5) 20% per year. With double-declining-balance
method, as the name suggests, double that rate, or 40%
depreciation rate is used.
The table below illustrates the double-declining-balance
method of depreciation. Book Value at the beginning of the
first year of depreciation is the Original Cost of the
asset. At any time Book Value equals Original Cost minus
Accumulated Depreciation.
Book Value = Original Cost - Accumulated Depreciation
Book Value at the end of year becomes Book Value at the
beginning of next year. The asset is depreciated until the
Book Value equals Salvage Value, or Scrap Value.
Book Value - Depriciation Rate Depreciation Accumulated Book
Value -
Beginning of Year Expense Depreciation End of Year

$1,000 (Original Cost) 40% $400 $400 $600
$600 40% $240 $640 $360
$360 40% $144 $784 $216
$216 40% $86. 40 $870. 40
$219. 60
$219. 60 $219. 60-$100
$29. 60 $900 $100(Scrap Value)
The Salvage Value is not considered in determining the
annual depreciation, but the Book Value of the asset being
depreciated is never brought below its Salvage Value,
regardless of the method used. The process continues until
the Salvage Value, or the end of the asset's useful life, is
reached. In the last year of depreciation a subtraction
might be needed in order to prevent Book Value from falling
below estimated Scrap Value.
Since declining-balance depreciation doesn't always
depreciate an asset fully by its end of life, some methods
also compute a straight-line depreciation each year, and
apply the greater of the two. This has the effect of
converting from declining-balance depreciation to
straight-line depreciation at a midpoint in the asset's life.
Activity depreciation
Activity depreciation methods are not based on time, but on
a level of activity. This could be miles driven for a
vehicle, or a cycle count for a machine. When the asset is
acquired, its life is estimated in terms of this level of
activity. Assume the vehicle above is estimated to go 50,000
miles in its lifetime. The per-mile depreciation rate is
calculated as: ($17,000 cost - $2,000 salvage) / 50,000
miles = $0.30 per mile. Each year, the depreciation expense
is then calculated by multiplying the rate by the actual
activity level.
Sum-of-Years' Digits Method
Sum-of-Years' Digits is a depreciation method that results
in a more accelerated write-off than straight line, but less
than declining-balance method. Under this method annual
depreciation is determined by multiplying the Depreciable
Cost by a schedule of fractions.
Depreciable Cost = Original Cost - Salvage Value
Book Value = Original Cost - Accumulated Depreciation
Example: If an asset has Original Cost $1000, a useful life
of 5 years and a Salvage Value of $100, compute its
depreciation schedule.
First, determine Years' digits. Since the asset has useful
life of 5 years, the Years' digits are: 5, 4, 3, 2, and 1.
Next, calculate the sum of the digits. 5+4+3+2+1=15
Depreciation rates are as follows:
5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the
3rd year, 2/15 for the 4th year, and 1/15 for the 5th year.
Book Value - Total Depreciable Depriciation Rate
Depreciation Accumulated Book Value -
Beginning of Year cost Expense Depreciation End of Year

$1,000 (Original Cost) $900 5 /15 $300
($900 * 5/15) $300 $700
$700 $900 4/15 $240 ($900 * 4/15) $540 $460
$460 $900 3 /15 $180 ($900 * 3/15) $720 $280
$280 $900 2 /15 $120 ($900 * 2/15) $840 $160
$160 $900 1 /15 $60 ($900 * 1/15) $900
$100(Scrap Value)
Units-of-Production Depreciation Method
Under the Units-of-Production method, useful life of the
asset is expressed in terms of the total number of units
expected to be produced. Annual depreciation is computed in
three steps.
First, a Depreciable Cost is computed.
Depreciable Cost = Original Cost - Salvage Value.
Second, Depreciation per Unit is computed. Depreciation
charge per unit is computed by dividing Depreciable Cost by
Total Units, expected to be produced during the useful life
of the asset.
Depreciation per Unit = Depreciable Cost / Total Units of
production
Third, annual depreciation, or Depreciation Expense, by
another name, is computed. Depreciation Expense equals
Depreciation per Unit multiplied by the number of units
produced during the year.
Depreciation Expense = Depreciation per Unit * Units
produced during the Year.
Book Value, as always, is calculated by subtracting
Accumulated Depreciation from the Original Cost.
Book Value = Original Cost - Accumulated Depreciation
Suppose, an asset has Original Cost $70,000, Salvage Value
$10,000, and is expected to produce 6,000 units.
Depreciable Cost = ($70,000-$10,000) $60,000
Depreciation per Unit = ($60,000 / 6,000) = $10
The table below illustrates the Units-of-Production
depreciation schedule of the asset.
Book Value - Units of Production Depreciation Cost
Depreciation Accumulated Book Value -
Beginning of Year per unit Expense Depreciation End of Year

$70,000 (Original Cost) $1,000 $10 $10,000 $10,000
$60,000
$60,000 $1,100 $10 $11,000 $21,000 $49,000
$49,000 $1,200 $10 $12,000 $33,000 $37,000
$37,000 $1,300 $10 $13,000 $46,000 $24,000
$24,000 $1,400 $10 $14,000 $60,000 $10000(Scrap Value)
Depreciation stops when Book Value is equal to the Scrap
Value of the asset. In the end the sum of Accumulated
Depreciation and Scrap Value equals to the Original Cost.
Units of time depreciation
Units of Time Depreciation is similar to units of
production, and is used for depreciation equipment used in
mine or natural resource exploration, or cases where the
amount the asset is used is not linear year to year.
A simple example can be given for construction co, where
some equipments are used only for some specific usage.
Depending on the number of projects the equipment will be
used and depreciation charged accordingly.
Group Depreciation Method
Group Depreciation method is used for depreciating
multiple-asset accounts using straight-line-depreciation
method. Assets must be similar in nature and have
approximately the same useful lives.
Asset Historical
Cost Salvage
Value Depreciable
Cost Life Depreciation
Per Year
Computers $5,500 $500 $5,000 5 $1,000
Composite Depreciation Method
The composite method is applied to a collection of assets
that are not similar, and have different service lives. For
example, computers and printers are not similar, but both
are part of the office equipment. Depreciation on all assets
is determined by using the straight-line-depreciation method.


Asset Historical
Cost Salvage
Value Depreciable
Cost Life Depreciation
Per Year
Computers $5,500 $500 $5,000 5 $1,000
Printers $1,000 $100 $ 900 3 $ 300
Total $ 6,500 $600 $5,900 4.5 $1,300
Composite life equals the total Depreciable Cost divided by
the total Depreciation Per Year. $5,900 / $1,300 = 4.5 years.
Composite Depreciation Rate equals Depreciation Per Year
divided by total Historical Cost. $1,300 / $6,500 = 0.20 = 20%
Depreciation Expense equals the composite Depreciation rate
times the balance in the asset account. (0.20 * $6,500)
$1,300. Debit Depreciation Expense and credit Accumulated
Depreciation.
When an asset is sold, debit Cash for the amount received
and credit the asset account for its original cost. Debit
the difference between the two to Accumulated Depreciation.
Under the Composite method no gain or loss is recognized on
the sale of an asset.
To calculate Composite Depreciation Rate, divide
Depreciation Per Year by total Historical Cost. To calculate
Depreciation Expense, multiply the result by the same total
Historical Cost. The result, not surprisingly, will equal to
the total Depreciation Per Year again.

Answer / ashirbad sahu

DEPRECIATION IN SIMPLE SENSE MEANS A DECREASE IN VALUE OF AN ASSET.EVEN ONE DOESNT USES IT BUT STILL THEIR IS DECREASE IN VALUE OF THE ASSET.

Answer / guest

Depreciation is simply systamatic allocation of depreciable
amount of an asset over its use full life .

methods used in depreciation are stright line and reducing
balancing methods.

Answer / divya jyothi

depreciation denotes gradually & permanent decrease in the value of asset due to wear and tear , technology changes , laps of time and accident.

Answer / gangi reddy

Depreciation ,it is nothing but permanent decrease in the value of the asset.
Ex- Technology changes

Answer / krishnaiah

Depreciation: A gradual reduction of an asset value due to wear & tear called Depreciation.
Methods:
1.Straight Line Method (SLM)
2.Declining Balance Method/Written Down Method (WDM)

In SAP we calculate depreciation using Straight line method/written Down method: Means we have a combination of Base Method, Multilevel Method & Period Control Method.
Depreciation Key determines the actual method of as asset.

Straight line method calculates the depreciation on APC/Book value of an Asset.
Written down method calculates the depreciation on net value of an Asset.

What are the components of controlling? : co- general controlling

0 Answers  

Where does TDS codes maintain and which fields are updated for TDS calculation for invoice/Advance

0 Answers  

why we need reconciliation account in SAP for AP and AR plz give em answer in details

7 Answers   HP,

How to SAP FI integrate with MM and SD. Please give me answer

2 Answers   Infosys,

1.Payment advise form name in Asset Accounting 2.Extending GL accounts in Company Code(FS00) 3.Need of Posting date in APP 4.Declining Method in Asset Accounting 5.Importing GL accounts with same GL account numbers. 6.In app we have two different Company Code with different Currencies. How will you run 2 APP 7. Hard Currency

2 Answers   Accenture,

How many chart accounts can be assinged to a company?

0 Answers  

What do you understand by sap cost center? Explain with the example? : cost center accounting

0 Answers  

I have created a Document number 1.Then later i corrected it,will the document number b changed,If i dont want the document number to b changed what should i do.

3 Answers   L&T,

Hi, Need a interview question and answer for different company's please revert me soon Yash

0 Answers   Accenture, IBM,

What are fi substitution rules?

0 Answers  

How many depreciation areas can be defined for a company code ? : fi- asset accounting

0 Answers  

WHAT IS T CODES FOR INTERGRET FI TO MM AND SD

4 Answers   Accenture, TCS,