How To Calculate And Register The Depreciation Fund

The management of the depreciation of assets (ie of the tangible and intangible assets of a company) is an integral part of the accounting profession. Evaluating the depreciation charge of assets is a core skill. By following the few, simple steps outlined in this guide, you will learn how to calculate the depreciation of an asset.

Steps

Familiarize yourself with the amortization plan concept. The depreciation rate of an asset is the portion of the cost of that asset that is expensed in the company’s annual budget. The depreciation fund is the total of these quotas until the cost of the asset is exhausted. The sinking fund is, in the balance sheet, a “contra-asset”, which means it is an account with a negative balance, which reduces the book value of the associated assets.

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Learn what a sinking fund is NOT: it shouldn’t be considered a valuation method, it is instead an allocation method. The long-term value of assets (e.g. real estate) will vary with market conditions. Depreciation is not done to account for these fluctuations. The purpose of the amortization plan is to gradually allocate the cost of an asset among the expenses of the company.

Come Calcolare e Iscrivere a Bilancio il Fondo di Ammortamento

Determine the annual amortization. For example, imagine your business buys a machine for $ 10,000 (or any other amount in any other currency). The machine is expected to last 10 years and has no salvage value. Using linear depreciation (the most common method), the annual expense is (10,000 / 10), i.e. 1,000 euros.

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Write down the depreciation expenses in the balance sheet. At the end of each accounting period (the year, in this example), create an item in the general balance sheet to allocate part of the cost of the asset to expenses in the company’s income statement. Creating this item is easy: enter the amortization charge of € 1,000 in expenses, and increase the accumulated depreciation by € 1,000.

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Close the accumulated depreciation. Remember that expense accounts are transitory and must be closed at the end of each accounting period. In this case, move the balance of the depreciation account to the income statement. From here it will go to reduce the income produced.

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Record the balance of the sinking fund on the balance sheet of the company. The sinking fund is a long-term account, called a counter-asset. As long as the purchased asset is reported in the balance sheet, the corresponding accumulated depreciation must also be reported. Continuing with the previous example, after 3 years, the value of the asset will still be recorded in the balance sheet as € 10,000 (in accordance with the Cost Principle). The depreciation fund will now have a balance of 3,000 euros.

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Keep the accumulated depreciation of the asset on the balance sheet, even when the asset is fully depreciated. After 10 years, the asset in the previous example will still be recorded in the balance sheet at a cost of 10,000 euros. The accumulated depreciation will be recorded at 10,000 euros. The asset is therefore fully depreciated, and these figures must remain recorded in the balance sheet as long as the asset is in use.

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Record the corresponding balance sheet item when the asset is sold or disposed of. This item depends on the price at which the asset is sold and the time at which it is sold.

In the example above, imagine that the asset is disposed of after 10 years or more. To record the item in the balance sheet, enter the depreciation fund for 10,000 euros as assets and assets for 10,000 euros as liabilities.

Now imagine that the same good is sold after 10 years or more for 500 euros. Enter the depreciation fund of 10,000 euros as assets and the 500 euros obtained from the sale of the asset as assets in cash. Enter liabilities of € 10,000 in the assets account and € 500 for the sale of the asset in the revenue account.

What happens if you sell the asset before it is fully depreciated? Let’s assume we sell the asset after 6 years for 4,000 euros. Enter the depreciation fund for 6,000 euros as assets and the cash register for 4,000 euros as assets. Enter liabilities of € 10,000 among assets.

Finally, imagine disposing of the asset before it is fully depreciated, say after 7 years. Enter the depreciation fund for 7,000 euros and the remaining 3,000 among the losses due to the disposal of assets. Enter liabilities of € 10,000 among assets.

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