Setup to Create Depreciation Journals
Setup to Create Depreciation Journals
Depreciation refers to: (1) the decrease in value of assets and (2) the systematic allocation of the recorded cost (value) of assets, over its useful life. It is a way of matching the cost of a fixed asset with the revenue or other economic benefits it generates over its useful life.
- Note: The cost of an asset includes both the amount paid for it as well as any additional amounts incurred transporting the asset and installing it in position
- Note: Low-cost items or items that aren't expected to last more than one year are recorded in expenses accounts rather than asset accounts
- Note: Land and trading stock items are not depreciating assets
Depreciation is the gradual charging to expense of an asset's cost over its expected useful life. The reason for using depreciation to gradually reduce the recorded cost of a fixed asset is to recognize a portion of the asset's expense at the same time that the company records the revenue that was generated by the fixed asset.
The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra-account that reduces the amount of fixed assets). Over time, the accumulated depreciation balance will continue to increase as more depreciation is added to it, until such time as it equals the original cost of the asset. At that time, stop recording any depreciation expense, since the cost of the asset has now been reduced to zero.
Click on the following ATO website link for more information on Depreciating Assets.
If correctly set up, Cashbook allows you to automatically create Depreciation Journals for assets entered into the Fixed Asset Register. Click on the following link for step by step instructions on How to Add an Asset to the Fixed Asset Register.
Step 1: Register
- Click on the Registers
- Fixed Assets menu option
iii. Click on the Groups ... button
Step 2: Asset Group
- Click on an Asset Group eg. Plant & Machinery, to highlight
- Click Edit
- An account code needs to be selected from the drop down menu next to each option
- Enterprise - optional
- Valuation method and Management depreciation rate - seek advice and direction from your accountant
Note: There are two Valuation Methods that can be used to calculate asset depreciation.
- Prime Cost - used to depreciated assets by equal amounts each year over its effective life
- Diminishing Value - uses a percentage to calculate depreciation. i.e. the value of a depreciating asset decreases more it the early years of its effective life
Click on the following ATO website link: Prime cost and diminishing value methods for further information.
Note: It is strongly advised you contact your accountant for help in calculating depreciation amounts and which method you should use. Your accountant can look at how your business operates to determine which method is appropriate. Also consult your accountant as to when to depreciate your assets, e.g. at the end of the financial year.
Below are examples of how these accounts should be set up in the Chart of Accounts:
Step 3: To Create Depreciation Journals
- Click on the Registers
- Fixed Assets menu option
iii. If happy that all assets have been entered to the Fixed Asset Register and filled in all fields, in particular Depreciation Rate % (Private Use %, if applicable) and Method (ie. Diminishing Cost or Prime Cost) and you have correctly allocated the correct account codes to each Fixed Asset Group (e.g. Plant & Equipment, Motor Vehicles, etc.), simply click on the Create Depn. Journals button.
- Select the ending date for depreciation journals. e.g. end of the financial year 30/06/2016
- Tick the Replace previous automatic depreciation journal entries box if wanting to replace any automatic journals that exist for that date
- Click OK to continue
v. Click Yes to the following Confirm message:
