Depreciation Engine
Complete guide to AssetVault's automated depreciation calculation engine.
Overview
The depreciation engine automatically calculates depreciation for all your assets using industry-standard methods compliant with accounting standards (IFRS, UK GAAP, US GAAP).
Supported Depreciation Methods
1. Straight-Line Depreciation
Formula:
Annual Depreciation = (Cost - Residual Value) / Useful Life
Characteristics:
- Even expense allocation over asset life
- Most common method
- Simple and predictable
- Suitable for most asset types
Example:
- Cost: £10,000
- Residual Value: £1,000
- Useful Life: 3 years
- Annual Depreciation: (£10,000 - £1,000) / 3 = £3,000/year
Monthly Depreciation: £3,000 / 12 = £250/month
2. Reducing Balance (Declining Balance)
Formula:
Annual Depreciation = Net Book Value × Depreciation Rate
Depreciation Rate:
Rate = 1 - (Residual Value / Cost)^(1 / Useful Life)
Characteristics:
- Higher depreciation in early years
- Declining expense over time
- Reflects faster value decline for certain assets
- Common for vehicles and IT equipment
Example:
- Cost: £10,000
- Residual Value: £1,000
- Useful Life: 3 years
- Rate: 1 - (1,000/10,000)^(1/3) = 0.536 or 53.6%
Year 1: £10,000 × 0.536 = £5,360
Year 2: £4,640 × 0.536 = £2,487
Year 3: £2,153 × 0.536 = £1,154
Configuration
Global Defaults
Set company-wide defaults:
- Navigate to Company → Configure
- Scroll to Depreciation Settings
- Configure:
- Default Method: Straight-line or Reducing balance
- Default Useful Life: Years (by asset type)
- Pro-rata First Year: Enable for mid-year purchases
- Residual Value %: Default percentage of cost
- Click Save Settings
Tutorial: Configuring Depreciation Settings
Asset-Level Overrides
Override defaults for individual assets:
- When creating or editing an asset
- Select custom Depreciation Method
- Enter custom Useful Life
- Set Residual Value if different from default
- Save
Depreciation Schedules
Viewing Schedules
For Single Asset:
- Navigate to asset details
- Click Depreciation Schedule tab
- View month-by-month breakdown
Table Format: | Period | Opening Balance | Depreciation | Closing Balance | Accumulated | |--------|----------------|--------------|-----------------|-------------| | Jan 24 | £10,000 | £250 | £9,750 | £250 | | Feb 24 | £9,750 | £250 | £9,500 | £500 | | ... | ... | ... | ... | ... |
For All Assets:
- Navigate to Reports → Depreciation Schedule
- Select date range
- Generate report (PDF or Excel)
Pro-Rata Depreciation
For assets purchased mid-year or mid-month.
How It Works
Example:
- Asset purchased on June 15, 2024
- Annual depreciation: £3,600
- Monthly depreciation: £300
June 2024:
- Days owned: 16 days (15th to 30th)
- Pro-rata depreciation: £300 × (16/30) = £160
July 2024 onwards:
- Full monthly depreciation: £300
Configuration
Enable in Company Settings → Pro-rata First Year
Options:
- ✅ Enabled: Calculate based on actual days
- ☐ Disabled: Full month depreciation from purchase month
Useful Life
Setting Useful Life
By Asset Type Defaults: | Asset Type | Recommended Useful Life | |------------|------------------------| | IT Equipment | 3-5 years | | Vehicles | 5-7 years | | Furniture | 7-10 years | | Machinery | 10-15 years | | Buildings | 25-50 years |
Custom Useful Life:
- Override at asset level
- Based on actual expected use
- Consider:
- Manufacturer warranty period
- Expected technology refresh cycles
- Industry standards
- Tax depreciation rules
Changing Useful Life
Impact:
- Depreciation recalculated from current period forward
- Historical depreciation unchanged
- New schedule generated
Steps:
- Edit asset
- Change Useful Life field
- Review new depreciation schedule
- Save
Warning: Only change if actual circumstances warrant it. Frequent changes impact audit trail.
Residual Value
Definition
Expected value at end of useful life.
Examples:
- Vehicle: Trade-in value after 5 years
- IT Equipment: Scrap/resale value
- Furniture: Minimal or zero
Setting Residual Value
As Percentage:
- Default: 0% for most assets
- Vehicles: 10-20% typical
- Specialized equipment: 5-15%
As Amount:
- Enter specific £ value
- Based on market research or experience
Formula Impact:
Depreciable Amount = Cost - Residual Value
Higher residual value = Lower depreciation expense
Depreciation Start Date
Depreciation begins on the purchase date (or lease commencement for ROU assets).
First Period Calculation:
- If pro-rata enabled: Based on days owned
- If pro-rata disabled: Full month depreciation
Example:
- Purchase Date: January 15
- First Depreciation: January 31 (or pro-rata if enabled)
Fully Depreciated Assets
When net book value reaches residual value:
Characteristics:
- No further depreciation calculated
- Asset remains on register at residual value
- Still active and tracked
- Can be disposed at any time
Display:
- NBV = Residual Value
- Accumulated Depreciation = Cost - Residual Value
- Status: "Fully Depreciated"
Depreciation Journals
Generating Journals
Automatic journal entries for posting to accounting system.
Period Journals:
- Navigate to Journals
- Select period (e.g., "January 2024")
- Click Generate Journals
- Review entries
- Click Post to finalize (or Export for manual posting)
Journal Entry Format:
Date: 2024-01-31
DR Depreciation Expense £X,XXX
CR Accumulated Depreciation £X,XXX
Description: Depreciation for January 2024
Journal Export
Export for posting to ERP:
- After generating journals
- Click Export
- Choose format (Excel or CSV)
- Import into your accounting system
Excel Template Includes:
- Account codes (customizable in settings)
- Debit/Credit columns
- Descriptions
- Period reference
Account Code Mapping
Map depreciation to your chart of accounts:
Settings:
- Navigate to Company → Configure → Nominal Mapping
- Set account codes:
- Depreciation Expense: e.g., 6000
- Accumulated Depreciation: e.g., 1200
- (Can vary by asset type if needed)
- Save
Result: Journals use your account codes in exports.
Reversing Depreciation
Scenarios:
- Asset sold mid-period
- Disposal before month-end
- Error correction
Steps:
- Navigate to asset
- Record disposal (triggers reversal)
- Or manually adjust via Impairment function
Effect:
- Current period depreciation adjusted
- Historical periods unchanged (if posted)
Depreciation Reports
Summary Reports
Total Depreciation by Period:
- Shows monthly depreciation expense
- Breakdown by asset type
- Trend analysis
Net Book Value Report:
- Current NBV of all assets
- Grouped by type/location/department
- Point-in-time valuation
Detailed Reports
Depreciation Schedule by Asset:
- Complete lifecycle schedule
- Month-by-month detail
- Export to Excel for analysis
Accumulated Depreciation Report:
- Total accumulated to date
- By asset and type
- Aging analysis
Advanced Features
Half-Year Convention
(Feature request - coming soon)
Assumes all assets purchased in first half of year are purchased on Jan 1, second half on Jul 1.
Use Case: Simplifies tax depreciation calculations
Component Depreciation
For assets with separable components (e.g., building and land).
Current Workaround:
- Create separate assets for each component
- Apply different useful lives
- Link via naming or notes
Future Enhancement: Native component tracking
Revaluation Model
(Coming soon)
Revalue assets to fair value instead of depreciated historical cost.
Use Case: IFRS-compliant revaluation for property
Troubleshooting
Depreciation not calculating:
- Verify useful life > 0
- Check purchase date is in the past
- Ensure asset isn't fully depreciated
- Review depreciation method is set
Incorrect depreciation amount:
- Verify cost, useful life, residual value
- Check depreciation method (straight-line vs. reducing balance)
- Ensure pro-rata settings match expectations
- Review asset effective date
Journal not generating:
- Check period is selected correctly
- Ensure assets exist for that period
- Verify journals haven't already been posted for that period
Can't change depreciation method:
- May be locked if journals posted
- Contact support for guidance on corrections
Best Practices
✅ Do:
- Set realistic useful lives
- Review depreciation schedules when adding assets
- Generate journals monthly for accurate financials
- Document reasons for useful life changes
- Use straight-line unless justified otherwise
❌ Don't:
- Change depreciation methods frequently
- Set unrealistic useful lives (too short or too long)
- Ignore fully depreciated assets (dispose if retired)
- Forget to post journals to accounting system
- Override pro-rata without understanding impact
Compliance Notes
IFRS Compliance
- Straight-line and reducing balance methods supported
- Component depreciation possible (via separate assets)
- Residual values considered
- Impairment testing separate (manual process)
UK GAAP / FRS 102
- Systematic allocation of depreciable amount
- Review useful lives annually (manual process)
- Residual values considered
Tax Depreciation
AssetVault calculates accounting depreciation. Tax depreciation (capital allowances) may differ.
Recommendation:
- Use AssetVault for book depreciation
- Maintain separate tax depreciation schedule if needed
- Or create duplicate assets with tax useful lives
FAQ
Q: Can I use different methods for book vs. tax?
A: Yes, create separate assets or maintain external tax depreciation records.
Q: What if I made a mistake in useful life?
A: Edit the asset and change useful life. Depreciation recalculates prospectively.
Q: Can depreciation be negative?
A: No. Depreciation stops when NBV reaches residual value.
Q: How is leap year handled?
A: Pro-rata calculations use actual days in month/year. Leap years have 366 days.
Q: Can I pause depreciation?
A: Not directly. Set useful life to a very high number temporarily, or mark asset as "Not in use" (feature request).
Video Tutorials
Next Steps
- Configure Company Settings
- Create Fixed Assets
- Generate Reports
- Export Journals
Support
Questions about depreciation?
Contact: [[CONTACT EMAIL]]
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