Successful activity of an enterprise implies an established mechanism for its work. The production process or the provision of services is impossible without a technical base. All buildings, machines, conveyors and vehicles are the basis for the implementation of the program of the enterprise. The funds are called fixed assets.
The exploitation of assets leads to their depreciation. For continuous operation, timely replacement of worn-out parts of the units, repair work in buildings or updating of production facilities is needed. Organizations make monthly contributions to an accumulative depreciation fund. He is on the balance sheet of the business unit.
Maintaining the property and units in good condition or their timely replacement and reconstruction is the key to success. Each manufacturing enterprise and service industry organization understands the importance of well-established work and development in the future.
The concept
Depreciation of fixed assets is a consistent reimbursement of the initial cost of the property of the enterprise. The expenses incurred by the organization, acquiring fixed assets, are divided into the final result of production - products. Or are calculated as part of the required repayment in a single time period. The amount of deductions for each month is directly dependent on the useful lives of fixed assets.
Thanks to depreciation, the company fully reimburses its costs. The accumulated capital is used to update worn-out units of machinery and equipment, as well as to carry out restoration work on buildings.
In other words, we can say that in time the company does not lose its money. Monthly deductions are included in the cost of goods at the exit, so the buyer pays for the acquired funds. This practice is common throughout the world in Russia, including. Without this type of measure, many manufacturing sectors would not be profitable in the usual way.
Functions
The purpose of the gradual reimbursement of the value of business entities is the accumulation of the amount of funds equal to or close to those spent on the material organization of activities. In addition, the accumulation of funds has the functions of:
- renewal of fixed assets;
- the creation of standards in planning the finances of the organization;
- capital accumulation to expand activities;
- determination of standards and an additional quantity to the cost price per unit of goods;
- development of a scientific and technical base;
- stimulation of the emergence of new property objects.
Today, the law provides for an increase in the value of property in relation to the initial during the renovation. Provided that the work performed is inseparable from the unit of funds. That is, when carrying out major repairs in the building, which provides for the replacement of pipes, ventilation shafts, and so on, the cost of replacing them is included in depreciation. This step has a positive effect on the general level of the financial situation of organizations.
Contributions to cover the value of fixed assets
The values and rates of redirection of funds to depreciation savings are based on the initial cost of fixed assets. The deductions for reimbursement of expenses look like a gradual accumulation on the depreciation fund, by dividing the entire initial amount into shares. The breakdown involves the annual repayment of certain amounts that are transferred to the finished product for one calendar year.
Mandatory deductions from the gross profit of the enterprise, which are used to restore the funds spent on the purchase of buildings and facilities, are calculated according to standardized indicators. Deductions occur from the first day of the month following the acquisition of funds. The process of reimbursing the cost continues until the full payback of fixed assets, their failure without the possibility of repair, change of ownership or end of life.
So, depreciation of fixed assets is a mechanism for distributing spent investment amounts, and depreciation is a consumption of capital.
Deductions as a source of formation of investment capital of companies
By covering the organizations spent capital on the purchase of equipment and buildings for several years of their operation, capital is formed. The funds act as investment and can be used to improve the enterprise, enriching its technical base.
If we compare the formation of investment capital through deductions for depreciation in the Russian Federation and in foreign countries, it is worth noting that in our country this figure is three times lower. Thus, companies in Europe and the world more than 60% cover their investment needs through depreciation savings.
Classification of capital consumption
How is depreciation of fixed assets calculated? For several reasons, namely:
- accrual method: linear and non-linear;
- accounting purposes: tax, accounting;
- use: target and non-target;
- period: accumulated and accumulated for a certain time;
- expenditure: used and unused.
Accrual can occur in other ways. The use of funds is based on the needs of the enterprise. Inappropriate use is called an injection of capital for purposes not related to the formation of fixed assets.
Modification of depreciation over time
Today, deductions for fund recovery have changed significantly and represent a more profitable distribution of capital. The changes are that the payments cover the full value of the property of the business entity, and the overhaul is not subject to depreciation. In addition, the service life by technical characteristics has become the main parameter for determining the amount of deductions.
To account for cash at the enterprise that is to be transferred to recovery funds, various methods for determining depreciation are used. Also, all accumulated funds remain in the possession of the enterprise and are distributed according to the decision of the management.
Methods of depreciation of fixed assets
The property of the enterprise in the form of fixed assets has a material form and a monetary expression of their value. In other words, acts as fixed assets.
Depreciation methods of fixed assets:
- decrease in residue;
- write off by the sum of years of operation;
- linear
- write-offs in direct proportion to output.
The accrual time of capital consumption means is the period of their appropriate use.
Linear way
Depreciation of fixed assets of the enterprise is determined in monetary terms for one calendar year. In the simplest, linear way, this value is obtained by adjusting the initial or renewed estimated value of the funds and their useful life. Data must be calculated after determining the depreciation rate of fixed assets.
Therefore, it is possible to determine the amount of annual depreciation by multiplying the total amount of expenses for the acquisition of depreciable property by the standard interest rate.
The useful life is the expected life of the equipment. Physical and moral depreciation is taken into account, and they are also guided by regulatory documents (rental agreements for equipment). Depreciation expense is incurred only within the time period specified by contractual obligations.
If the reconstruction of the funds was carried out, then depreciation is determined as the value adjusted by the percentage of the norm. This indicator will change based on the estimated useful lives of the funds.
This is one of the simplest methods for calculating depreciation values. Its obvious advantage is that it is calculated very simply, and the amount received is divided into each month of the year. So, by the end of the operational life of production facilities, their cost will be fully covered. The disadvantage of this method is the lack of accounting for the volume of production batches, the mode of operation of the equipment and its pace of work.
The method is not correct for constantly operating capacities, therefore it is more often used to determine the value of cash costs for the passive part of funds. Usually these are industrial and warehouse buildings, as well as an office building.
The method of calculating the balance to reduce
According to the residual value, the calculation of depreciation of fixed assets differs from the linear one in that the annual amount of write-off of funds for depreciation decreases with time. It involves the calculation of depreciation on the basis of the initial cost of funds at the beginning of the year, adjusted for the depreciation rate.
Coefficient - an indicator determined by the decision of the organization’s management, it cannot exceed the value 3. Calculations are carried out within the useful operational period.
This calculation option has a faster term for the renewal of capital spent. Often the last year of use has a final residual value or liquidation value.
Depreciation and amortization of fixed assets in a quick way
The method for the total number of numbers is based on mandatory deductions every month for all the estimated payback years. Initially, the value formed during the purchase is adjusted by the ratio of the years that remained on the basis of depreciation for the full term of operation.
Reimbursement of costs and investments in this case also proceeds faster than in the previous ones, since the value of the ratio of years is less every year.
Production method
The depreciation method has a completely different basis for deductions; it comes from the volume of production. It is based on the purchase of funds, the number of finished goods ready for sale and its planned volume. This method of calculation shows that the cost of restoring capital is not constant, but is variable. They are directly dependent on the quantitative result of production.
The choice of calculation method
The management of a business unit makes a decision on choosing the most convenient method of recovering initial costs. The further development of the enterprise will depend on how soon the fund is replenished. In the end, we get solid capital on the balance sheet of a business unit.
The return of funds spent on the acquisition of funds in a quick way is possible if the business unit can afford large withdrawals and the withdrawal of significant amounts of money from circulation. Only in this case it is advisable to apply accelerated compensation.
It is also worth noting that the faster the business entity returns its funds, the lower the tax rate.
The depreciation method depends on:
- profitability of production;
- quantitative indicator of the ratio of income and expenses;
- accounting costs;
- restrictions on depreciation rates by tax law;
There are different deduction rates for different groups of property. The basis is the approved list in Article 25 of the Tax Code of the Russian Federation.
Termination of depreciation
The return of property costs occurs after all planned payments have ceased. At the end of the deduction period, the business unit, at the discretion of management, uses the accumulated capital.
The legislation establishes a list of property units for which depreciation of fixed assets is not carried out:
- canned products;
- funds of organizations conducting non-profit activities;
- property of the enterprise, if its quality indicators in the process of carrying out activities remain unchanged.
The remaining groups of funds are depreciated without fail.
Industrial enterprises have significant property capital, which should be maintained at the proper level. Technical characteristics of equipment and vehicles directly characterize the production capacity of the organization. A stable injection of capital into the depreciation fund ensures a sufficient level of investment in the future.