Depreciation is one of the most controversial issues in accounting and management accounting. The fact is that it is impossible to reliably determine to what extent fixed assets of an enterprise lose their value during the production cycle, therefore, for its calculations, resort to the construction of simplified models. Meanwhile, depreciation, although it is only the fruit of mathematical calculations, significantly affects the profits of the enterprise, and hence the payment of taxes. That is why the calculation of depreciation plays such an important role in management and accounting.
The calculation of depreciation deductions, in many respects, depends on the selected service life of the equipment. Despite, that there are certain standards, it is impossible to accurately predict when the equipment will need to be changed due to moral or physical wear and tear. Therefore, a certain average, maximum objective value is chosen as the service life. Even more difficult is the determination of residual value, i.e. the cost of equipment at the end of the expected life. It is impossible to accurately determine the condition of the equipment after ten years, and the market situation is completely unpredictable. Therefore, the residual value is literally determined “by eye”.
Further depreciation calculation based on the above data. The residual is deducted from the initial cost of the equipment, and the resulting amount is written off to the expenses of the enterprise throughout the entire estimated life. Amortization can be written off in various ways, and in many cases, companies have the right to independently choose the most suitable method. Today, depreciation is calculated in four main ways: linear or one of a group of non-linear.
The linear method involves uniform writing off the cost of equipment. This method is considered simplified and is suitable for accounting for simple equipment and simple situations in which leasing, rental, etc. are not involved. The total cost to be debited is divided by the term of operation, and the amount received is included in the corresponding expense item every year.
The use of accelerated depreciation methods is based on the fact that at the beginning of the service, the equipment loses its value more than at the final stages, therefore, to correctly reflect the value on the balance sheet, it is necessary to reflect this trend when writing off depreciation as an expense. The most popular non-linear method is the residual reduction method. Calculation of depreciation deductions in this way involves the use in the calculations not of the entire cost of the equipment, but of the balance that is reflected on the balance sheet for the current year. That is, from year to year the balance will decrease, and, therefore, the depreciation deductions themselves.
There is also a rather rarely used method of calculating depreciation based on output. First, a certain limit is set for the output of equipment, and then a share equal to the share of output to the established limit is deducted from its value.
Regardless of the method chosen, depreciation charges remain within the enterprise itself, so the use of depreciation is a rather important issue. By the logic of things, they must be used to purchase new equipment. And although many managers really perceive depreciation as a source of investment, it can also be used to pay for labor, purchase raw materials, etc. One way or another, you need to choose the most optimal solution for the company, because an effective approach to solving the depreciation issue is the key to the company's prosperity in the long term.