Depreciation Rate for Furniture and Office Equipment
Tangible Fixed Assets
The main point about the purchase of a Fixed Asset is that the business willprobably own it for some time, in other words, it is not an Expense.Tangible Fixed Assets are normally grouped into categories, especially forBalance Sheetreporting.The main categories of Tangible Fixed Assets are:• Land• Buildings• Furniture and Fittings• Computers• Motor Vehicles• Plant & MachineryMost Fixed Assets gradually lose value because they have a limited useful life- they’depreciate’, which means that they lose their value. So they have to bedepreciatedin theYear End Accounts.Fixed Assets depreciate at different rates, which is one of the main reasonsfor grouping similar assets together.
Depreciation and Tax
For small businesses, thedepreciation policy does not affect tax.HMRC ignores depreciationwhen calculating tax, because they have a different system for setting offFixed Assets costs against tax – calledCapital Allowances- see below.
Reducing Balance Depreciation
Another depreciation method is thereducing balance method. This method may be suitable when the Fixed Asset will be gradually losingits value, but its useful life cannot be precisely estimated. For example avan may cost £8,000. In the first year 25%, ie £2,000 could be depreciated,leaving a balance of £6,000. In year 2, 25% is depreciated from the reducedbalance of £6,000, ie. £1,500, leaving a balance of £4,500, and so on.
Fixed Asset Depreciation
If you have fixed assets they need to be depreciated. Depreciation of assetsare done through regular write-offs for wear and tear. When you buy an asset,the purchase price becomes the asset’s initial value. At the time of purchasethis will not effect your profit-and-loss since the asset is not an expense.However, as the asset is used, and its value dimishes through wear and tear,you should depreciate the asset. When you depreciate an asset its valuediminishes and the depreciation amount becomes an expense in your books.Depreciations are also referred to as wear and tear allowances or write-offs.To read more about fixed asset deprecation you can click this link to go toWikipedia, which gives an easy-to-understand introduction to fixed assetdepreciation.
What are Fixed Assets
Fixed assets are assets that you use in your business to run the business. Forexample computers are fixed assets, so are any machines that you use inproduction or any buildings that you own. Smaller products can also be fixedassets, such as desks or office chairs. Whether or not it is a fixed asset isdetermined by the nature and price of the product. 1. A fixed asset has to have a life-cycle exceeding one year. 2. A fixed asset has to exceed a certain price. In South Africa any product that costs more than R2000 (amount may change, please consult the current value for the tax authorities) is classified as a fixed asset.(excluding goods that you trade).If the product costs more than R2000 , but has a life-cycle of less than oneyear, you can consider it as an expense and do not need to enter it as a fixedasset. The reason for this is that such a fixed asset would have to bedepreciated to zero within the first year (i.e. which is equal to entering itas an expense anyway).
Declining Balance Depreciation
In the declining balance method, the depreciation for year j is calculated bymultiplying the book value at the end of the prior period (cost – accumulateddepreciation from prior periods) by a fixed depreciation rate, d. This methodis commonly called the Double-Declining Balance Method because thedepreciation rate that is used is usually double the straight-line rate ord=2/n. The factor 2 is often specified as 200%. The depreciation formula foryear j is:Dj = min(d*BVj-1, max(0, BVj-1-Sn) ) BVj-1 = C(1-d)j-1 =DDB(C, Sn, n, j, factor) where d=factor/n. =VDB(C, Sn, n, j-1, j, factor, TRUE)The Book Value is not allowed to be less than the Salvage Value. The SalvageValue is not included in the Book Value calculation for the declining balancemethod, so that necessitates the use of the MIN and MAX functions in the aboveformula. The Excel function, DDB(), handles all of that for you.The VDB (variable declining balance) function is a more general depreciationformula that can be used for switching to straight-line (see below). Theboolean value TRUE as the last argument tells the function NOT to switch tostraight-line.
Declining Balance Depreciation with Switch to Straight-Line
It is common for a company to switch from the declining balance depreciationmethod to the straight-line method in the year that the depreciation from thestraight-line depreciation method is greater. The VDB function has thisfeature built-in. The formula for calculating the depreciation for year j is:Dj = VDB(C, Sn, n, j-1, j, factor, FALSE) where factor = 200%, 150% or 125%
What is Fixed Asset?
A fixed asset is something a business buys, generally using it for more thanone year and is fundamental to running the business.In the example above, the Amazon seller will use the laptop for running andmanaging their business.Examples of small business fixed assets include things like: * Laptop; * Printer; * Vehicle; * Premises; * Office furniture.Learn more: What is a Fixed Asset and How to Calculate Its Cost
Depreciation Rate for Furniture and Office Equipment
A business fits out a new office, buying various pieces of furniture andoffice equipment. The business expects that it will use the furniture for 10years. The depreciation rate will be calculated over 10 years.
Depreciation for Land
In the UK it is considered that land will always have a value of at least thesame price it was purchased for, if not go up in value.For this reason, it is common for land not to be depreciated in UK accounting.
Reducing Balance Method of Depreciation
The reducing balance method of depreciation is used if an asset depreciatesmore at the start of its life compared to the end of its life.It is particularly applicable if you have an asset that loses significantvalue at the beginning of its life, such as a van or lorry.In the first year, you calculate depreciation of the asset by a percentage.Then in the following years, you calculate depreciation at the same percentagebased on the remaining value rather than the original cost.
Example of Calculating Reducing Balance Depreciation
You have purchased a company pickup truck for £44,000 and estimate it willlose 30% of its value in the first year.Depreciation for the first 5 years would be calculated out as follows:Year| Value| Depreciation (30%)| Book Value remaining —|—|—|— 1| £44,000.00| £13,200.00| £30,800.00 2| £30,800.00| £9,240.00| £21,560.00 3| £21,560.00| £6,468.00| £15,092.00 4| £15,092.00| £4,527.60| £10,564.40 5| £10,564.40| £3,169.32| £7,395.08