Fixed Assets - Depreciation Conventions

Depreciation is a periodic transaction that typically reduces the value of the fixed asset on the balance sheet, and is charged as an expenditure to a profit and loss account. Therefore, a main account is usually used for crediting the periodic depreciation on the balance sheet. An offset account is an account in the profit and loss part of the chart of accounts.

Various depreciation methods and conventions are available in the system. The purpose of the methods is to allocate the depreciable value of the fixed asset into fiscal periods. The depreciable value of the fixed asset is the acquisition price, reduced by a scrap value, if any.

Depreciable value = Acquisition price – Scrap Price (if any)

When using depreciation conventions, if  the last depreciation run date for an asset is modified, which then causes some depreciations to be skipped, the depreciation for the last year might be more than or less than is expected. The depreciation is adjusted by the number of depreciation periods affected by the modification of the last depreciation run date.

Depreciation Conventions

During the first year in service, depreciation is calculated using the depreciation method and averaging convention for the asset. The resulting depreciation amount is distributed over the period of time from the date it was placed in service to the last day of the year.

The Mid-month (1st of month), Mid-month (15th of Month), or Full Month averaging convention must be used only if the fiscal periods are set up in a manner that matches the calendar year.

The averaging convention does not change the dates an asset is retired or placed in service. It only uses a ‘pre-defined’ date to calculate the depreciation based on the averaging convention defined for the asset.

The following averaging conventions are available in Fixed Asset Management:

• None:  Assets will begin depreciating on the date it was placed in service and will be retired on the retirement date.

• Half-year:   Assets begin depreciating on the Placed in Service Date. In the year of disposal, assets are retired on the last day of the first half of the year.

Only half of the depreciation amount is taken in the year an asset is acquired. This also applies to the year in which you dispose of an asset and to the year in which the life is complete, based on the original life of the asset. The asset doesn’t depreciate after the first half of its final year.

• Mid-month (1st of month):  Assets that are placed in service in the first half of the month — days 1 through 15 — will begin depreciating on the first day of the month.

Assets that are placed in service in the second half of the month — day 16 through end of month — will begin depreciating on the first day of the next month.

Assets with a retirement date in the first half of the month — day 1 through 15 — are considered retired on the last day of the previous month.

Assets with a retirement date in the second half of the month — day 16 through end of month — will be retired on the last day of the month.

• Mid-month (15th of Month):  Assets that are placed in service at any time during the month will begin depreciating on the 16th of the month. Assets that were placed in service in February will begin depreciating on the 15th of the month.

Assets retired at any time during the month will be retired on the 15th of the month of the retirement date. Assets retired in February will be retired on the 14th of the month.

• Mid-quarter:   Assets that are placed in service at any time during the quarter will begin depreciating on the middle day of the second month of the quarter.

Assets retired at any time during the quarter are considered retired on the middle day of the second month of the quarter.

For Example: Consider a January to March quarter.

Asset A002 was acquired on 31st January; Asset A008 was acquired on 9th March and Asset A015 was acquired on 31st March. With the Mid-Quarter depreciation, all these asset will begin depreciating from the 15th of February in the same year.

Asset Z009 was retired on 21st January; Asset Z021 was retired on 12th February and Asset Z045 was retired on 21st March. Given the convention, all these assets will be considered retired on 15th February.

• Full Month:   Assets that are placed in service at any time during the month will begin depreciating on the first day of the month.

Assets retired at any time during the month are considered retired on the last day of the previous month.