Fixed Asset Depreciation

If you have fixed assets they need to be depreciated. Depreciation of assets are done through regular write-offs for wear and tear. When you buy an asset, the purchase price becomes the asset's initial value. At the time of purchase this will not effect your profit-and-loss since the asset is not an expense. However, as the asset is used, and its value dimishes through wear and tear, you should depreciate the asset. When you depreciate an asset its value diminishes and the depreciation amount becomes an expense in your books. Depreciations are also referred to as wear and tear allowances or write-offs.

To read more about fixed asset deprecation you can click this link to go to Wikipedia, which gives an easy-to-understand introduction to fixed asset depreciation.

What are Fixed Assets

Fixed assets are assets that you use in your business to run the business. For example computers are fixed assets, so are any machines that you use in production or any buildings that you own. Smaller products can also be fixed assets, such as desks or office chairs. Whether or not it is a fixed asset is determined by the nature and price of the product.

A fixed asset has to have a life-cycle exceeding one year.
A fixed asset has to exceed a certain price. In South Africa any product that costs more than R2000 (amount may change, please consult the current value for the tax authorities) is classified as a fixed asset.(excluding goods that you trade).

If the product costs more than R2000 , but has a life-cycle of less than one year, you can consider it as an expense and do not need to enter it as a fixed asset. The reason for this is that such a fixed asset would have to be depreciated to zero within the first year (i.e. which is equal to entering it as an expense anyway).

Depreciation Regulations

There are regulations governing the rate at which fixed assets can be depreciated for tax purposes. The maximum allowed depreciation rate depends on the type of fixed asset you have purchased. You should consult South African Revenue Service if you have bought an asset and you don't know the allowed depreciation rate.

Deprecation rates (as of 2004) for the most common fixed assets:

Asset type	Rate
Air-conditioners	16,6%
Burglar alarms (removable)	10%
Computers (PC)	33,3%
Computer Software	50%
Fax machines	33,3%
Furniture and fittings	16,6%
Passenger Cars	20%
Photocopying Equipment	20%
Power tools (hand-operated)	20%
Shop fittings	16,6%
Telephone equipment	20%
Trucks (heavy duty)	33,3%
Trucks (other)	25%
Workshop equipment	20%

Setting the Depreciation Rate

You set the Depreciation rate when you create the fixed asset in your books. You create a fixed asset in Financials » Ledger and Accounts » P01 New Account. Select account group Fixed Asset.

Depreciation Methods

Wear and tear allowances can be claimed on either a Reducing Balance Method (RMB) or on a Straight-Line Basis (SLB), in which certain requirements must be met. You should consult SARS if you can use the Straight-Line Basis on a specific asset you have bought.

Reducing Balance Method

When you use the Reducing Balance Method your depreciation amount will diminish as the fixed asset gets older, because the basis for the depreciation is the current balance of the fixed asset. For instance, let us assume you buy a Photocopier for R10,000. With a depreciation rate of 20% your depreciations when using the Reducing Balance Method would be:

Year	Depreciation	Ending Balance
Year 1	R 2000.00	R 8000.00
Year 2	R 1600.00	R 6400.00
Year 3	R 1280.00	R 5120.00
Year 4	R 1024.00	R 4096.00
Year 5	R 819.20	R 3276.80

Straight-Line Basis

When you use the Straight-Line Basis, your depreciation amount will be the same every year because the basis for every depreciation is the purchase price. If we use the same example as for the Reducing Balance Method, your depreciations would be:

Year	Depreciation	Ending Balance
Year 1	R 2000.00	R 8000.00
Year 2	R 2000.00	R 6000.00
Year 3	R 2000.00	R 4000.00
Year 4	R 2000.00	R 2000.00
Year 5	R 2000.00	R 0

Comparing the Methods

It is normally considered as beneficial to use the straight-line basis because you can depreciate the asset much quicker. This will give you a higher expense and therefore a lower tax. However, this will depend on what you want for your business.

Setting the Depreciation Method

You set the depreciation method when you create the fixed asset in your books. You create a fixed asset in Financials » Fixed Assets » P72 New Fixed Asset.

Depreciation Policy

SMARTEDGE supports two different ways to perform depreciations. You can choose to

depreciate monthly, or
depreciate annually

Depreciations are an annual occurence for tax purposes. When you use annual depreciation, it will not be reflected in your profit-and-loss statement for each period of the year. The depreciation will only be reflected on your annual profit-and-loss statement.

To remedy this, you can choose to do your depreciations periodically. In this case, the system will allocate 1/12 of your annual depreciation to every month of the year, giving you a more correct picture of your expenses throughout the year.

Any discrepancies between the monthly depreciation amount and the annual depreciation amount (i.e. the official depreciation) will be corrected in the 12th period, so that the sum of your monthly depreciations equals the exact annual depreciation.

Using monthly depreciations will give you a continuous depreciation throughout the year and the sum of monthly depreciations will equal the annual depreciation.

Setting the Depreciation Policy

You set the depreciation policy for a fixed asset when you create it. You create a fixed asset in Financials » Fixed Assets » P72 New Fixed Asset.

Depreciations in the 1st Year

You are normally not allowed to perform full depreciation the year you purchase the asset.

If regulations allow for full depreciation in the year you bought the asset, then a full years depreciation will be posted regardless of whether you bought the asset in the first or the last month of your financial year.

Pro-Rata depreciation reduces the depreciation amount the first year, depending on when you bought the asset. If you bought it in the last month of your financial year, the first year depreciation will be 1/12 of the yearly depreciation. If you bought it in the middle of your financial year, the first year depreciation will be 1/6 of your yearly depreciation.

Setting your 1st year Depreciation Policy

You set the 1st year depreciation policy in Configuration » Company Administration » X00 Company Preferences » Accounting. The depreciation 1st year policy you choose will be used on all your fixed assets

It is recommended that you use pro-rata depreciation for the first year, unless national regulations allows otherwise.

When Are Depreciations Done?

To perform depreciations for a period go to Financials » Fixed Assets » P75 Wear and Tear Depreciation.

Where Can I Look at My Depreciations?

If you want to see your depreciations for a fixed asset, you go to the Fixed Asset List. Select the fixed asset you want to view and click the tab Depreciation Plan. The depreciation plan for the account will be displayed.

Be aware that if you use annual depreciations, you will only see depreciations for the annual period of the year.

You can also go to the Financials » Fixed Assets » P73 Fixed Asset Ledger to view depreciations for several fixed assets.