Create Depreciation Setup – A summary of the activity
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This activity allows you to create a depreciation rule and assign it to the depreciation book. The depreciation rules are combination of depreciation properties defined for an asset class, which will be assigned to depreciation asset category. The depreciation rule defined will be later assigned to the depreciation book.
Fixed Assets of a manufacturing concern like Business Premises, Plant and Machinery, Furniture and Fittings etc., are acquired for use in business. These assets decrease in value year after year due to wear and tear or due to lapse of time. This decrease in value of the Fixed Assets is called depreciation. The depreciation represents a revenue loss and therefore it should be shown against the profit earned. For example, a person buying the machinery of worth Rs. 30, 000, may estimate the life of the machinery as five years, which means that the asset is reducing in value every year by Rs. 6, 000.
There are several methods by which the depreciation is calculated.
Depreciation Methods
The various methods in calculating the depreciation are:
Straight Line – A fixed percentage on the original cost of the asset is charged every year as depreciation, so that the asset account may be reduced to zero or scrap value at the end of definite period representing its estimated life.
Diminishing Balance – The asset is depreciated by a fixed percentage every year on the diminishing balance of the asset account. This method is usually adopted in the Plant and Machinery.
Sum of Years Digits - The assets are depreciated based on the useful life of an asset. This is the method where you charge maximum depreciation during the initial period and gradually decrease the depreciable charge towards the end of the useful life of the asset.
Depreciation Book
Depreciation books are used to compute different parallel depreciation for each of the stakeholders in the business like Management, Statutory Authorities, Costing etc.
Depreciation book can be defined to allow depreciation below asset value (except Corporate and Tax Book).
Mandatory Depreciation Books are:
Corporate – this will interact with the Finance Book Processing.
Tax – this will interact with the Tax Book Processing.
In addition to above Mandatory book, user defined books, for example, costing depreciation book can also be defined.
Depreciation book can be defined to allow depreciation below asset value for User defined books
Depreciation Category
Depreciation Category will be required to group Asset Tags with common depreciation properties. Asset Class will have a default Depreciation Category. Multiple depreciation categories under an Asset Class would be required when there is a need to have different depreciation rate/methods/conventions etc. in the same depreciation book, for assets falling under the asset class.
Example – Heavy Machinery (to be depreciated at SLM 10%) and Light Machinery (to be depreciated at WDV 20%) in Corporate Depreciation Book under the Asset Class Plant & Machinery.
This activity also allows you to define a depreciation calendar with respect to each depreciation book. You can define your own calendars for the books other than “Corporate” or the “Tax” books. You can also assign the depreciation rule to a Depreciation Category and map it to a depreciation book.
The system updates the status of the depreciation rule to “Active” on creation. The system also updates the login ID of the user to the created by and the system date to the created date.
Getting familiar with the pages inside
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Create Depreciation Rule |
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Create Depreciation Rate |
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Create Depreciation Category |
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Create Depreciation Calendar |
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Assign Rule |
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View Depreciation Rule |
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View Function Defaults |
What you can do in this activity
Create user defined depreciation rule
Processing depreciation based on method
Defining depreciation calendar
Grouping assets into depreciation category
Create user defined depreciation rule
The depreciation rule, which is combination of methods, rates, useful life, basis and convention can be defined in this activity. You can define a depreciation rule for each asset class.
Go to “Create Depreciation Rule” page.
For the asset class, provide a unique rule number and a description to the depreciation rule.
Provide necessary information for defining the rule.
Specify the yearly depreciation rate (if Yearly Percent is selected) for the useful life of an asset and create the depreciation rule.
The system updates the status of the depreciation rule to “Active”. The system also updates the login ID of the user to the created by and the system date to the created date field.
Processing depreciation based on method
The method in which the depreciation has to be calculated can be specified in this activity. The system then calculates the depreciation for the asset with the rate specified.
Go to “Create Depreciation Rule” page.
Specify the depreciation method as “Straight Line” or “Diminishing Balance” or the “Sum of Years Digit”.
The system calculates the depreciation based on the method selected.
Different depreciation rates can be defined for a particular rate ID spanning across different periods.
Go to “Create Depreciation Rate” page.
Provide a unique rate ID and a description to it.
Specify the depreciation rate details for the defined depreciation rate ID. Enter the effective from date and the system automatically calculates the expiration date (the effective from date of the next defined rate –1).
On creation of the depreciation rate, the system updates the status to “Active”. The system also updates the login ID of the user to the created by and the system date to the created date.
Defining depreciation calendar
The calendar defined in the ‘’Create Calendar’’ activity of the ‘’Accounting Setup’’ business component becomes the default calendar for the Corporate Depreciation Books and the Tax Depreciation Books, if any. The user can define a calendar for the user- defined Depreciation Books.
Go to “Create Depreciation Calendar” page.
For the book, provide a unique code for the financial year and the period.
Specify the start date and the end date for both financial year and the period.
Create the depreciation calendar.
Grouping assets into depreciation category
The depreciation category can be defined under the asset class.
Go to “Create Depreciation Category” page.
For the asset class, define the depreciation category and provide a description.
The system updates the status of the category to Fresh on creation. When a Depreciation Rule is mapped to a Depreciation Category and the Category is mapped to a Depreciation Book Code in “Assign Rule” activity, the Category becomes “Active”.
The depreciation rules can be viewed before creating the depreciation category.
Go to “Create Depreciation Rule” page.
Select the “View Rules” link at the bottom of the page to view the depreciation rule.