Depreciation Methods

The Depreciation Methods define the various approaches to depreciating rental equipment. There are 6 valid methods allowed.

Methods can be maintained in the Depreciation Methods window in the "Inventory" parameters on the Accounting tab of the Configure System Settings.
An operator must be assigned a Security Role that allows permission to the Accounting - Depreciation Methods in order to access this table.

DECLINING BALANCE METHOD - Code D

The Declining Balance method calculates depreciation based on the Current Book Value of an item. Because the Book Value of an item decreases each year, the amount of depreciation also decreases each year. There is no limit to the number of years that declining balance can be applied, however, a residual percentage may be set. When the Book Value reaches the residual amount, depreciation stops.
For example, if the residual is 5% and the cost is $1000, then when the Book Value equals $50 (.05 x $1000) the depreciation stops. Declining Balance can be done monthly or yearly.

Declining Balance Formula:
(Original Cost - Accumulated Depreciation) * Depreciation Rate = Depreciation Amount

EXAMPLE:
Cost $1000.00
Depreciation rate 10% per year.
Book Value = Original Cost - Accumulated Depreciation

First Year  ($1000.00 -  0)                    * .10 = 100.00    Book Value = $900.00
Second Year ($1000.00 - 100.00)                * .10 =  90.00    Book Value = $810.00
Third Year  ($1000.00 - (100.00 + 90.00))      * .10 =  81.00    Book Value = $729.00
Fourth Year ($1000.00 - (100.00 + 90.00 + 81)) * .10 =  72.90    Book Value = $656.10

STRAIGHT LINE METHOD - Code S

The Straight Line Method calculates depreciation on the Original Cost. Because the Original Cost remains the same amount, the amount of depreciation also remains constant. After a fixed number of years, the item will be fully depreciated and depreciation stops. A residual percentage may also be used. When the Book Value reaches this residual amount, depreciation stops.
For example, if the residual is 5% and the cost is $1000, then when the Book Value equals $50 (.05 x $1000) the depreciation stops. Straight Line can be done monthly or yearly.

Straight Line Formula:
Original Cost x Depreciation Rate = Depreciation Amount

EXAMPLE:
Cost $1000.00
Depreciation rate 10% per year.
Book Value = Original Cost - Accumulated Depreciation

First Year   $1000.00       * .10 =     100.00    Book Value = $900.00
Second Year  $1000.00       * .10 =     100.00    Book Value = $800.00
Third Year   $1000.00       * .10 =     100.00    Book Value = $700.00
Fourth Year  $1000.00       * .10 =     100.00    Book Value = $600.00

Note: Using a 'Straight Line 'method with a residual percent setup in Depreciation Classes, the Depreciation Base To Exclude Residual flag in the Company Posting Parameters controls whether the depreciation and the alternate depreciation calculations are based on the full value of the equipment, or on the value of the equipment less the residual.

PERCENTAGE OF RENTAL REVENUE DEPRECIATION METHOD - Code %

This method of depreciation is designed to calculate the depreciation as a percentage of rental revenue each time an item is rented. It applies to non-bulk rental equipment only. The code for this depreciation method is " % ". Any depreciation classes setup with this method will depreciate non-bulk items by the class percentage each time a rental invoice is posted. The depreciation calculated will post to the General Ledger at the same time as the rental revenue. When the Depreciation Schedule is run, any item with the percent method will be skipped.

The depreciation calculation will stop at the residual value. When non-bulk items with this depreciation method are sold, the Book Value is posted to the COST OF RENTAL EQUIPMENT SOLD instead of the cost.

Each time a non-bulk rental item with the percentage method of depreciation is rented, the depreciation is automatically written into the Depreciation history. This can be viewed using Rental Inventory in the Fixed Asset Tag Window, on the Accumulated Depreciation Amount field.
The Source is the Invoice #, and the Depreciation Date is the Invoice Date.

1. To proceed, setup the method % for PERCENT OF RENTAL REVENUE in DEPRECIATION METHODS.

2. In Depreciation Classes, follow these examples:

   CLASS  DESCRIPTION                       METHOD RATE %  DEPNS   RESIDUAL %
   -----  -----------                       ====== ------  ------  ----------
   P10-5  10% of Rental Revenue-5% Residual    %    10.00               5.00
   P10    10% of Rental Revenue-no Residual    %    10.00
   P20    20% of Rental Revenue-10% Residual   %    30.00              10.00
   

3. In Rental Inventory, select one of the above classes on the Asset Tag.

4. When a non-bulk item with the percentage depreciation class is rented, the posting of the rental invoice will be:

   Rental Revenue = $100, depreciation is 10% of rental revenue

     Rental Revenue is              CREDITED with the rental        $100.00
     Accounts Receivable is         DEBITED  with the rental        $100.00
     Rental Equipment is            CREDITED with depreciation       $10.00
     Cost Of Rental Equip Sold is   DEBITED  with the depreciation   $10.00
   

5. When a non-bulk item with the percentage depreciation class is sold, the posting of the disposal uses the Book Value:

     Sale of Rental Equip is        CREDITED  with the selling price
     Accounts Receivable is         DEBITED   with the selling price
     Rental Equipment is            CREDITED  with the Book Value
     Cost of Rental Equip Sold is   DEBITED   with the Book Value
   

PERCENTAGE OF RENTAL REVENUE - BUT NO POST - Code #

This method of depreciation works the same as the "Percentage of Rental Revenue" with the code % as explained above, however the depreciated amount does NOT automatically post to the General Ledger. Instead, each time a non-bulk rental item with this percentage method of depreciation is rented, the depreciation record to is written to Depreciation Calculations where it can be reviewed and edited.
The Fixed Asset tag and depreciation history is only updated when these records are printed and accepted in Print Depreciation Report.

This method is represented by the code "#".

Any residual values on products will be respected by this depreciation method.

1. To proceed, setup method # for PERCENT OF REVENUE - NO POST in DEPRECIATION METHODS.

2. In Depreciation Classes, follow these examples:

   CLASS  DESCRIPTION                       METHOD  RATE %  DEPNS  RESIDUAL %
   -----  -----------                       ======  ------  ------ ----------
   P10-5  10% of Rental Revenue-5% Residual   #     10.00              5.00
   P10    10% of Rental Revenue-no Residual   #     10.00              0.00
   P20    20% of Rental Revenue-10% Residual  #     20.00             10.00
   

3. In Rental Inventory, select one of the above classes on the Asset Tag.

FLAT RATE - Code A

When a Flat Rate method is selected on the Fixed Asset Tag, the DEPRECIATION AMOUNT PER UNIT must also be entered on the tag. This amount times the quantity on the tag is the depreciation amount charged. Residual % still applies.
The code for Flat Rate is A.

MACRS DEPRECIATION - Code M

Using the MACRS (Modified Accelerated Cost Recovery System) depreciation method, different depreciation rates can be applied for different years. A table of these changing rates can be setup in MACRS Depreciation Table to apply to each calendar year.

1. Setup method M for MACRS in DEPRECIATION METHODS.
2. Assign the classes in Depreciation Classes.
   e.g. 5YR - 5 YEAR MACRS or 10YR - 10 YEAR MACRS
3. Use MACRS Depreciation Table to setup the yearly percentage rates to be depreciated for each depreciation class.
4. In Rental Inventory, select one of the classes on the Asset Tag.

   RULES applying to MACRS include:
   

   • If a product on a Fixed Asset Tag is bought, sold, and depreciated, in the same calendar year (Jan-Dec), then all the accumulated MACRS depreciation will be removed from the tag.
   • Fixed Asset Tags need to be fully depreciated evenly each month in the first calendar year for the full year's depreciation, regardless of when the product was acquired in the year. This means the full annual depreciation amount is applied.
   • On the year of sale, the depreciation is always done for six months of that calendar year.
     • If the equipment has been "over depreciated" the required reversing depreciation is generated.
     • If the equipment has been "under depreciated" a catchup depreciation is generated.
   • Additions on an Asset Tag are depreciated separately from the original product, based on the additional value, at the rate for the appropriate year. This allows the addition to be depreciated at a different yearly rate than the original product.
     The addition depreciation is then added in, to be included in the total depreciation amount on the tag.

The utility MACRS Accumulated Depreciation can be run when the MACRS depreciation method is first activated, to ensure that the accumulated depreciation amount that is used for any "catch-up" calculation, matches the amounts manually entered on the tag.