Depreciation of fixed assets characterizes the depreciation of any type of fixed assets. It can be: production equipment, transport, tools, heat and electricity networks, gas pipelines, buildings, household equipment, bridges, freeways and other structures, computer software, museum and library funds.
Fixed assets are outdated, but not worn out physically. Depreciation is obsolescence due to the appearance of their analogues, which are more competitive: technologies, equipment, transport, etc.
Reasons for obsolescence
Depreciation of fixed assets begins to play an important role in production costs. There are several reasons for this:
1. The production of the same types of fixed assets becomes cheaper. It happens like this. Manufacturers are trying to reduce production costs, apply other technologies, economical materials. As a result, the price becomes lower, for example, on the equipment that they produce. And the same equipment purchased earlier from the same manufacturer is becoming obsolete. Because it was more expensive. The costs of producing products manufactured by her were higher. Since the rate of depreciation is taken into account the initial cost of fixed assets. When accounting revaluation of fixed assets, the loss will be the difference in prices.
2. Technology upgrade or release of improved equipment analogues. They are faster; have better accuracy, are more economical, require less repairs. And most importantly, they allow you to produce products with low cost. With the development of technical developments, products of the engineering industry, for example, are updated every 5-6 years. In computer production, updates occur every 2-3 years. Using obsolete equipment is unprofitable. The business owner incurs losses from production costs. And again, losses on the revaluation of the means of production, since depreciation does not cover their value.
3. The social cause of obsolescence. When fixed assets do not meet the accepted level of safety or environmental safety in society. Sometimes you do not need a replacement of fixed assets. For example, with obsolescence, the building ceases to comply with new sanitary standards or planning projects. Then it needs to be upgraded. Or carry out major repairs.
Why wear
The success of business depends on the deterioration of fixed assets. Depreciation determines:
- volume of issue;
- product quality;
- segment size in the market;
- costs in the cost of production.
Given and controlling wear and tear, you successfully manage your business. After all, there is still physical wear.
Physical depreciation of fixed assets
Fixed assets sooner or later fail. During their work, a whole range of conditions applies:
- humidity;
- temperature;
- load when using;
- equipment operation in several shifts;
- quality of service;
Sometimes physical depreciation can be reduced with a major overhaul, and sometimes fixed assets need to be replaced.
The size of physical deterioration is affected by the properties of materials, specified characteristics, and the general quality of fixed assets.
Depreciation and amortization
Depreciation - an increase in production costs included in the cost of production by the rate of depreciation deductions from the value of fixed assets.
Depreciation is accumulated for the repair, re-equipment or purchase of fixed assets.
There are norms defined in the state classifier. They set the value of depreciation for each type of fixed assets.
For each type of fixed assets, the classifier sets the service life. The method when depreciation is calculated according to established standards is called linear.
Physical and moral depreciation in monetary terms is called depreciation.
How to reduce obsolescence losses
If fixed assets are used intensively, losses from obsolescence will decrease. The intensity of use should pay for fixed assets during the period of their renewal. Use:
- Decrease in service life standards;
- increase in wear rates;
- accelerated depreciation.
Track the timing of obsolescence of equipment. They are taken into account in the updated depreciation rates.
What is accelerated depreciation
In order to update fixed assets more quickly, accelerated depreciation is widely used in practice. Its meaning is to transfer the value of fixed assets to the cost of goods or services in shares, above the norm.
It is believed that by applying such a policy, the state offers a moderate overstatement of depreciation rates. For example, it is proposed to write off the cost of equipment for almost 5 years, whose service life is 7 years.
Do not forget that, using the accelerated depreciation method, you automatically increase production costs. This reduces the company's profit.