Depreciation Calculation

The system automatically creates a depreciation schedule based on the Depreciation Method, Total Number of Depreciations, etc., and other related inputs like Available to Use Date in the Asset record. It is also possible to create multiple depreciation schedules for different Finance Books. You need to tick the Calculate Depreciation checkbox while creating an asset if you want the system to create the depreciation schedule.

Different depreciation methods in ERPNext:

• Straight line: In this method, the value of an asset is reduced uniformly over its useful life until it reaches its salvage value. For example: if the asset is worth 1000 and its salvage value is 500 after 5 years, the straight line method would depreciate the asset by 100 every month/year. This method is useful when there is no particular pattern to how the depreciation takes place over a period of time. You can use the Depreciate based on daily pro-rata option if you want the depreciation amount to vary depending on the number of days in a calendar period. You can use the Depreciate based on shifts option to define the number of shifts the asset would run in a period in order to depreciate it accordingly. You need to first define the shift names with their shift factors in the Asset Shift Factor doctype (for example: "half": 0.5, "single": 1, "double": 1.5 and "triple": 2) and set a default. Later if you want to change the shifts of an asset for a particular period, you can do so using the Asset Shift Allocation doctype, and the remaining shifts are automatically adjusted.

• Double Declining Balance: This is also known as 200% declining balance. This method is useful when the asset depreciates fast in the beginning and slows down later. For example: if the asset is worth 1,00,000 and its salvage value is 11,000 after 8 years, the depreciation schedule would be:

  Current Value	Depreciation	Booked Value
  1,00,000.00	25,000.00	75,000.00
  75,000.00	18,750.00	56,250.00
  56,250.00	14,063.00	42,187.50
  42,187.50	10,547.00	31,640.62
  31,640.62	7,910.00	23,730.46
  23,730.46	5,933.00	17,797.84
  17,797.84	4,449.00	13,348.38
  13,348.38	2,348.00	11,000.00

• Written Down Value: In this method, you can set a particular rate of depreciation or let the system calculate the rate of depreciation based on the asset’s purchase amount, salvage value and useful life. The rate of depreciation is applied on the current written down value of the asset to calculate the depreciation amount for each year. This method is useful for assets which have higher depreciation in the initial years. For example: if the asset’s purchase amount is 1,000 and rate of depreciation is 10% over 5 years, the depreciation schedule would be:

  Current Value	Depreciation	Booked Value
  1,000.00	100.00	900.00
  900.00	90.00	810.00
  810.00	81.00	729.00
  729.00	72.90	656.10
  656.10	65.61	590.49

• Manual: In this method, first a system-generated depreciation schedule would be created for your convenience based on the depreciation details set, and you can then edit the schedule dates and depreciation amounts manually for any period according to your needs.

Automatic depreciation entries

You can enable booking of depreciation entry automatically from Accounts Settings. This will create depreciation entries automatically on the scheduled dates. Otherwise, you have to create the Journal Entry manually by clicking "Make Depreciation Entry" button in the corresponding Depreciation Schedule row.

Accounting entries on depreciation

In the depreciation entry:

• "Accumulated Depreciation Account" is credited and

• "Depreciation Expense Account" is debited.

The related accounts can be set in the Asset Category or Company.

Asset value chart

For better understanding, net value of the asset on different depreciation dates are shown in a line graph.

Related Topics

1. Asset Maintenance

2. Asset Value Adjustment

3. Scrapping an Asset