UNIT 8: Depreciation

Amortisation is the expression of the systematic annual decrease in the value of non-current assets: intangible assets (20) and items of property, plant and equipment (21) upon use in the production process, and in the value of investment property (22). It is the accounting registration of depreciation. The devaluation has to be: -DUE TO: the test of time or the usage -NOT DUE TO: unexpected or unusual events (natural disasters, robberies, etc) 1. AMORTISATION *** NOTE THAT!: -Lands are not depreciated!!! – No depreciation for accounts 210 “Lands and Natural Resources” or 220 “Investment in Lands and Natural Resources” is registered. -VAT is not included in the value to depreciate

Concepts to calculate amortisation: -Useful Life: number of years while the non current asset is expected to be useful. -Residual Value: amount to obtain from the non current asset once its useful life ends. (Value once the element is not useful anymore) Using these concepts, you can calculate 2 more items needed to register depreciation: -Value to depreciate: Purchasing or Cost Value – Residual Value -Annual depreciation: Value to depreciate / Useful Life

Accounts to use during the Amortisation process: -(680) Amortisation of Intangible Assets (681) Depreciation of Property, Plant and Equipment -(682) Depreciation of Investment Property EXPENSES -(280) Accumulated Amortisation of Intangible Assets -(281) Accumulated Depreciation of Property, Plant and Equipment -(282) Accumulated Depreciation of Investment Property MINUS ASSET (Offsetting the Asset Accounts from Subgroups: 20, 21 and 22)

EXAMPLE 1 A Corporation purchases software on January the 1st, 20X1 of 2700 € (VAT not included). It's purchased on credit to be paid in 3 months. Residual Value: 300 € (VAT not included). It will be depreciated in 3 years. a) Calculations b) Journals c) Ledger and Balance Sheet (ONLY accounts related to the Non-Current Asset) 1.1.) Amortisation by whole years Useful Life as Data

a) Calculations

PURCHASING VALUE - RESIDUAL VALUE VALUE TO DEPRECIATE /USEFUL LIFE PURCHASING VALUE - ACCU. DEPRECIATION Amount to register each year at (68_) and (28_) To register when purchasing at (20_) Each year Balance of (28_)

Computer Software Input VAT (21% x 2700) Current payables to suppliers of fixed assets Amortisation of Intangible Assets (Amount: Annual Depreciation: 800) Accumulated Amortisation of Intangible Assets Accum. Amortisation of Intangible Assets – MINUS ASSET b) Journals X1 --> When purchasing X1 --> At the end of the year: Depreciation X2 --> Same registration at journals X3 --> Same registration at journals

c) Ledger and Balance Sheet (only accounts related to the Non Current Asset) X1 --> After registering 20X1 depreciation: Computer Software Accumulated Amortisation of Intangible Assets 800 BALANCE SHEET ASSETS1900EQUITY Computer Software(206)2700 Accumulated Amortisation of Intangible Assets (280)800LIABILITIE S Debit Balance = 2700 Credit Balance = 800 NET VALUE (OF THE NON CURRENT ASSET) = 1900 = PURCHASING VALUE (2__) - ACCUM. DEPRECIATION (28_) =

X2 --> After registering 20X2 depreciation: Computer Software Accumulated Amortisation of Intangible Assets 800 BALANCE SHEET ASSETS1100EQUITY Computer Software(206)2700 Accumulated Amortisation of Intangible Assets (280)1600LIABILITIE S Debit Balance = 2700 Credit Balance = 1600 NET VALUE (OF THE COMPUTER) = 1100

X3 --> After registering 20X3 depreciation: Computer Software Accumulated Amortisation of Intangible Assets 800 BALANCE SHEET ASSETS300EQUITY Computer Software(206)2700 Accumulated Amortisation of Intangible Assets (280)2400LIABILITIE S Debit Balance = 2700 Credit Balance = 2400 NET VALUE (OF THE COMPUTER) = > RESIDUAL VALUE Net Value (At the End of Useful Life) = Residual Value

EXAMPLE 2 A Corporation purchases a machinery on April the 1st, 20X1 of 7000 € (VAT not included). It's purchased on credit to be paid in 2 years. Residual Value: 1000 € (VAT not included). It is to depreciate at an annual rate of 33,33%. a) Calculations b) Journals c) Ledger and Balance Sheet (ONLY accounts related to the Non-Current Asset) 1.2.) Amortisation with splitted years Amortisation Percentage as Data

How to change data: Useful LifeDepreciation Rate (Years)(%) DATA: Annual Depreciation Rate 33,33% Years of Useful Life? 33,33% --> In 1 Year 100% --> In Useful Life (Years?) Useful Life (Years) = 100% / 33,33% = 1/0,3333 = 3 years Depreciation Rate (%) --> In 1 Year 100% --> In Useful Life (Years)

a) Calculations

Amount to register each year at (68_) and (28_) Each year Balance of (28_) To register when purchasing at (21_) PURCHASING VALUE - RESIDUAL VALUE VALUE TO DEPRECIATE X DEP. RATE PURCHASING VALUE - ACCU. DEPRECIATION

Machinery Input VAT (21% x 7000) Non Current payables to suppliers of fixed assets Depreciation of Property, Plant and Equipment Accumulated Depreciation of Property, Plant and Equipment Accum. Dep. of Prop., Plant and Equipment – MINUS ASSET b) Journals X1 --> When purchasing X1 --> At the end of the year: Depreciation of 9 months

Depreciation of Property, Plant and Equipment Accumulated Depreciation of Property, Plant and Equipment X2 and X3 --> At the end of the year: Depreciation - Same as before but different amount (for the whole year) X4 --> At the end of its useful life: Depreciation of 3 months of 20X Depreciation of Property, Plant and Equipment Accumulated Depreciation of Property, Plant and Equipment 500

c) Ledger and Balance Sheet (only accounts related to the Non Current Asset) X1 --> After registering 20X1 depreciation: Machinery Accumulated Depreciation of Property, Plant and Equipment 1500 BALANCE SHEET ASSETS5500EQUITY Machinery(213)7000 Accumulated Dep. of Prop, Plant and Equipment (281)1500LIABILITIES Debit Balance = 7000 Credit Balance =1500 NET VALUE (OF THE NON CURRENT ASSET) = 5500 = PURCHASING VALUE (2__) - ACCUM. DEPRECIATION (28_) =

X2 --> After registering 20X2 depreciation: Machinery Accumulated Dep. Of Property, Plant and Equipment BALANCE SHEET ASSETS3500EQUITY Machinery(213)7000 Accumulated Dep. Of Prop. Plant and Equipment (281)3500LIABILITI ES Debit Balance = 7000 Credit Balance = 3500 NET VALUE (OF THE COMPUTER) = 3500

X4 --> After registering 20X4 depreciation: Machinery Accumulated Dep. Of Property, Plant and Equipment BALANCE SHEET ASSETS1000EQUITY Machinery(213)7000 Accumulated Dep. Of Prop. Plant and Equipment (281)6000LIABILITI ES Debit Balance = 7000 Credit Balance = 6000 NET VALUE (OF THE MACHINERY) = > RESIDUAL VALUE Net Value (At the End of Useful Life) = Residual Value

EXAMPLE 3 A Corporation purchases a computer on January the 1 st, 20X1. for 1100 € (VAT not included). It's purchased on credit to be paid in 1 month. Residual Value: 100 € (VAT not included). The corporation decides to register depreciation at the minimum number of years allowed according to tax depreciation tables. a) Calculations b) Journals c) Ledger and Balance Sheet (ONLY accounts related to the Non-Current Asset) 1.3.) Amortisation according to Tax Depreciation Tables

-Contained at the Corporation Income Tax rules (they are part of a Tax Rule, not an Accounting one: they are not part of the Accounting Plan) -For each type of element (Information Technology Equipment for example), you are given 2 possible maximum data in 2 columns (25 – 8): -First Column – RATE  Maximum Depreciation Rate: 25% -Second Column – YEARS  Maximum Number of years for Useful Life: 8 Years TAX DEPRECIATION TABLES

Any data given as a Rate can be changed to Years and vice versa as: Dep Rate X%  1 year 100%  Y years of Useful Life. DEPRECIATION RATEYEARS 25% TAX TABLE Maximum depreciation Rate allowed according to tax 4 years (100%/25% Dep rate) Minimum number of years as useful life, according to tax 12,5% (100%/8 years) Minimum depreciation Rate allowed according to tax 8 years TAX TABLE Maximum number of years as useful life, according to tax -Taxes allow any rate between 12,5% and 25% (or, what is the same, any useful life between 4 and 8 years) -According to the statement “the corporation decides to register depreciation at the minimum number of years allowed according to tax”  That’s 4 years (25% Dep. Rate)

a) Calculations

Information Technology Equipment Input VAT (21% x 1100) Current payables to suppliers of fixed assets Depreciation of Property, Plant and Equipment Accumulated Depreciation of Property, Plant and Equipment 250 b) Journals X1 --> When purchasing X1 --> At the end of the year: Depreciation X2 --> Same registration at journals X4 --> Same registration at journals X3 --> Same registration at journals

c) Ledger and Balance Sheet (only accounts related to the Non Current Asset) X1 --> After registering 20X1 depreciation: 217 – Information Technology Equipment Accumulated Depreciation of Property, Plant and Equipment 250 BALANCE SHEET ASSETS850EQUITY Information Technology Eq.(217)1100 Accumulated Dep. of Prop, Plant and Equipment (281) 250LIABILITIES Debit Balance = 1100 Credit Balance =250 NET VALUE (OF THE NON CURRENT ASSET) = 850 = PURCHASING VALUE (2__) - ACCUM. DEPRECIATION (28_) =

X4 --> After registering 20X4 depreciation: 217 – Information Technology Equipment Accumulated Dep. Of Property, Plant and Equipment 250 (20X1) 250 (20X2) 250 (20X3) 250 (20X4) BALANCE SHEET ASSETS100EQUITY Information Technology Eq.(217)1100 Accumulated Dep. Of Prop. Plant and Equipment (281)1000LIABILITI ES Debit Balance = 1100 Credit Balance = 1000 NET VALUE (OF THE COMPUTER) = > RESIDUAL VALUE Net Value (At the End of Useful Life) = Residual Value

EXAMPLE 4 A Corporation purchases a computer on January the 1 st, 20X1 for 1600 € (VAT not included). It's purchased on credit to be paid in 3 months. Residual Value: 0 €. The corporation decides to register depreciation at the minimum number of years allowed according to tax depreciation tables. It is sold on April the 1 st, 20X3 for 780 € (VAT not included) on credit. a) Calculations b) Journals 2. SALE Profit or Loss arising when selling to be registered at date of sale: Profit or Loss = = Sales Price – Net Book Value of the Non-Current Asset at date of sale = Sales Price – (Purchasing cost – Accum. Dep. at date of sale)

a) Calculations -Taxes allow any rate between 12,5% and 25% (or, what is the same, any useful life between 4 and 8 years).  Minimum number of years allowed according to taxes: 4 years.

Information Technology Equipment Input VAT (21% x 1600) Current payables to suppliers of fixed assets Depreciation of Property, Plant and Equipment Accumulated Depreciation of Information Technology Equipment 400 b) Journals X1 --> When purchasing X1 --> At the end of the year: Depreciation Depreciation of Property, Plant and Equipment Accumulated Depreciation of Information Technology Equipment X2 --> At the end of the year: Depreciation

Depreciation of Property, Plant and Equipment Accumulated Depreciation of Information Technology Equipment X3 --> Date of Sale Receivables (780 X 1,21) Accumulated Depreciation of Information Technology Equipment Information Technology Equipment Output VAT (780 X 0,21) Gains on Property, Plant and Equipment 943, ,8 80 Sale registering the profit or loss Depreciation for 3 months of 20X3 440  “Receivables” (Different from 430 “Trade Receivables”) 217 and 2817  When liquidating the Non Current Asset Account (217), the Accumulated Depreciation (2817) has to disappear as well.

Accounts where to register the Profit or Loss: -670 – Losses on Intangibles Assets -671 – Losses on Property, Plant and Equipment -672 – Losses on Investment Property -770 – Gains on Intangible Assets -771 – Gains on Property, Plant and Equipment -772 – Gains on Investment Property