Different Methods of Depreciation Calculation

created by Darrick Arora on Sep 11, 2013 10:5 AM, last !odified by Darrick Arora on Sep 11,
2013 11:"0 AM
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Depreciation Calculation Methods
#arious depreciation calculation !ethods are !entioned belo$:
i% &ase Method
ii% Declinin' &alance Method
iii% Ma(i!u! A!ount Method
i)% Multi *e)el Method
)% +eriod Control Method

i% &ase Method
&ase Method, S+-./ 0M1/ 2inancial Accountin' 34e$5/ Asset Accountin'/Depreciation/
#aluation Methods/ Depreciation 6ey/ Calculation Methods/Define &ase Methods
&ase !ethod pri!arily specifies:
7he 7ype of depreciation 3.rdinary8 Special Depreciation5
Depreciation Method used 3Strai'ht *ine8 9ritten Do$n )alue Method5
7reat!ent of the depreciation at the end of +lanned useful life of asset or $hen the
4et &ook )alue of asset is :ero 3;(plained in detail later in other related transactions 5%

Strai'ht *ine Method 3S*M5
7his is the si!ple !ethod of depreciation%
0t char'es e<ual a!ount of depreciation each year o)er useful life of asset%
0t first add up all the costs incurred to brin' the asset in use and then it di)ides that
by the useful life of asset in years to calculate the depreciation e(pense%
;%'%: Say a Co!puter costs -s% 30,000 and -s% 11,000 3as additional set,
up8installation8!aintenance e(penses5 = -s "1,000 and it is anticipated that its scrap )alue
$ill be -s% 1,000 at the end of its useful life, of say, 5 yrs%

7otal Cost = Cost of Co!puter > 0nstallation ;(p% > .ther Direct Costs
Depreciable A!ount o)er 4o% of years = 7otal Cost , Sal)a'e #alue 3At end of useful life5

30,000 >11,000 ="1,000 37otal cost5
"1,000 ? 1,000 = "0,000 as the Depreciable A!ount
Depreciable A!ount = -s% "0,000, Spread out o)er 5 years = -s% "0,000853@rs5 = -s% A0008,
depreciation per annu!%

9ritten Do$n #alue Method 39D#5
7his !ethod in)ol)es applyin' the depreciation rate on the 4et &ook #alue 34&#5 of
asset% 0n this !ethod, depreciation of the asset is done at a constant rate%
0n this !ethod depreciation char'es reduces each successi)e period%
7his !ethod should be used in those assets, $here hi'h depreciation should be
char'ed in initial years%
Assu!e the price of a depreciable asset i%e% co!puter is -s% "0,000 and its sal)a'e
)alue after 10 years is 0%
0n this !ethod 4&# $ill ne)er be :ero%
Depreciation +er year = 31845 +re)ious yearBs )alue, 9here 4= 4o% of years
So in our e(a!ple, the depreciation a!ount durin' the first year is
C-s% "0,000D1810E =-s% ",000
4&# of co!puter after 1st year= -s "0,000, ",000 = -s% 3,000
Depreciation for 2nd year is
C-s% 3,000D1810E =-s% 3,00

ii% Declinin' &alance Method
;nter 7ransaction code A2AMD, Chan'e #ie$ FDeclinin' &alance MethodG
A2AMD, Chan'e #ie$ FDeclinin' &alance MethodG, S+-./ 0M1/ 2inancial Accountin'
34e$5/ Asset Accountin'/Depreciation/ #aluation Methods/ Depreciation 6ey/ Calculation
Methods/ Define Declinin',&alance Methods
7his is the other na!e of 9ritten Do$n #alue 39D#5 !ethod as !entioned in &ase !ethod
abo)e%
0f the 9D# !ethod is specified in &ase !ethod then the follo$in' additional settin's in this
!ethod can be used:
A !ultiplication factor for deter!inin' the depreciation percenta'e rate% 7he syste!
!ultiplies the depreciation percenta'e rate resultin' fro! the total useful life by this factor%
A lo$er li!it for the rate of depreciation% 0f a lo$er depreciation percenta'e rate is
produced fro! the useful life, !ultiplication factor or nu!ber of units to be depreciated, then
the syste! uses the !ini!u! percenta'e rate specified here%
An upper li!it for the rate of depreciation%0f a hi'her depreciation percenta'e rate is
produced fro! the useful life, !ultiplication factor or nu!ber of units to be depreciated, then
the syste! uses the !a(i!u! percenta'e rate specified here%

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iii% Ma(i!u! A!ount Method
Ma(i!u! A!ount Method, S+-./ 0M1/ 2inancial Accountin' 34e$5/ Asset
Accountin'/Depreciation/ #aluation Methods/ Depreciation 6ey/ Calculation Methods/
Define Ma(i!u! A!ount Method

1enerally, 0f $e uses Strai'ht line !ethod, then depreciation a!ount should be sa!e for all
years% &ut depreciation on asset is subHect to chan'e due to !any factors e%'% any addition to
the asset, chan'e in esti!ate of useful life, chan'e in esti!ate of scrap )alue etc%

So for !aintainin' better control on the a!ount of depreciation, SA+ has pro)ided this
!ethod $here $e can specify the !a(i!u! a!ount that can be char'ed as e(pense in a
particular year% 0f this is specified, user $ill not be able to post depreciation e(ceedin' the
a!ount specified here%

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i)% Multi *e)el Method
;nter 7ransaction code A2AMS, Chan'e #ie$ FMultile)el MethodG
A2AMS, Chan'e #ie$ FMulti *e)el MethodG, S+-./ 0M1/ 2inancial Accountin' 34e$5/
Asset Accountin'/Depreciation/ #aluation Methods/ Depreciation 6ey/ Calculation
Methods/ Define Multi *e)el Methods

As the na!e itself su''ests, this !ethod pro)ides the fle(ibility to specify different rate of
depreciation for different years8periods% ;%'% in so!e cases depreciation rate re<uired is
different in initial years and after that the rate should be chan'ed% 7his can be achie)ed in
SA+ by usin' Multi le)el Method%
0n this !ethod, SA+ pro)ides us the possibility to specify different le)els durin' the useful life
of an asset% ;ach le)el represents the period of )alidity of a certain percenta'e rate of
depreciation% 7his percenta'e rate is then replaced by the ne(t percenta'e rate $hen its
period of )alidity has e(pired% 9e can specify the )alidity period for the indi)idual le)els of a
asset in years and !onths%
0t also pro)ides the fle(ibility to us to choose the defined )alidity period, $hich can be'ins $ith
7he capitali:ation date%
7he start date for ordinary or ta( depreciation%
7he ori'inal ac<uisition date of the asset under construction%
7he chan'eo)er year%

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)% +eriod Control !ethod
;nter 7ransaction code A2AM+, Maintain +eriod Control Method
A2AM+, Maintain +eriod Control MethodsG, S+-./ 0M1/ 2inancial Accountin' 34e$5/ Asset
Accountin'/Depreciation/ #aluation Methods/ Depreciation 6ey/ Calculation Methods/
Maintain +eriod Control Methods

0t is one of the !ost rele)ant !ethod to keep control on the calculation of depreciation% Iere
$e !ention the different rules for periods in case of different scenarios for assets% 7his
!ethod controls the period for $hich the depreciation is calculated on an asset durin' the
year%
Jnder this !ethod, $e can specify the period for $hich the depreciation should be calculated
in case of :
Ac<uisition of Asset8Subse<uent ac<uisition
-etire!ents8Scrap
Sales87ransfers
Jp$ard8Do$n$ard -e)aluation
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7here are so!e standard !ethods that has been pro)ided by SA+ e%'% +ro rata at
!id period, +ro rata at period start date, at the start of year or At !id year etc% ;%'%, 0f client
re<uires to depreciate an asset fro! the 2irst day of the year in $hich the asset is capitalised,
$e can use the !ethod LAt the start of the @earL in case of Ac<uisition%

7his !ethod has been e(plained $ith the help of one co!prehensi)e e(a!ple belo$:

;(a!ple: A co!pany $ants to char'e depreciation as follo$s% Client follo$s calendar year
fro! Manuary,Dece!ber 2013 as
Accountin'82iscal year%
1% 0n case of Asset Ac<uisition: Depreciation should start fro! the 2irst day of the year in
$hich asset is ac<uired%
2% 0n case of Asset Addition: Depreciation should start fro! the 0st day of period of date of
addition%
3% 0n case of Asset retire!ent: Depreciation should be char'ed upto Mid period re'ardless of
date of retire!ent%
"% 0n case of Asset 7ransfer: Depreciation for the full year should be char'ed by the
transferee co!pany%

After ha)in' kno$led'e of all the depreciation calculation !ethods, $e can assi'n the
depreciation calculation !ethods to the depreciation key%

Creation of Depreciation key:

Asset accountin' !odule of SA+ calculates the depreciation on Assets based on the
confi'uration done for Depreciation key% Depreciation 6ey basically contains the calculation
!ethods $hich in co!bination control the follo$in':
+eriod for $hich Depreciation is char'ed
Method of Depreciation
Scrap )alue, if any
+lanned chan'e in Method of Depreciation
9e enter a separate depreciation key for each depreciation area in the asset !aster record%


Creatin' Depreciation 6ey:
;nter 7ransaction code A2AMA, Chan'e #ie$ FDepreciation 6eyG
A2AMA, Chan'e #ie$ FDepreciation 6eyG, S+-./ 0M1/ 2inancial Accountin'
34e$5/ Asset Accountin'/Special #aluation/ 4et 9orth 7a(/Depreciation 6ey/Define
Depreciation keys

As depreciation key is Chart of Depreciation dependent, syste! $ill pro!pt to enter chart of
Depreciation on accessin' transaction A2AMA and screen sho$n belo$ $ill be displayed%

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Iere, $e need to specify the follo$in' at appropriate fieldsOcheck bo(es:
4o%84a!e of Depreciation key 4u!eric8Alphanu!eric%
Ma(i!u! A!ount !ethod 3Discussed abo)e in !ethods of depreciation5
Cutoff )alue key to control the scrap )alue if no absolute scrap )alue is !aintained in
the syste!% 7he cutoff percenta'e rate that is deter!ined on the basis of this cutoff )alue key
is only used by the syste! $hen:
7here is no absolute scrap )alue entered in the the depreciation areas of the asset
concerned 3an absolute scrap )alue takes precedence o)er a cutoff percenta'e rate5
4e'ati)e book )alue is not allo$ed for the asset
9hether ordinary depreciation should continue to be char'ed in a year in $hich
special depriciation is also char'ed on the asset or notP
Set LDepreciation to the dayL indicator to allo$ syste! to calculate the depreciation
accordin' to the nu!ber of days the asset is used%
0f this indicator is set, period control !ethod assi'ned to depreciation key $ill be i'nored and
Asset )alue date $ill be considered as the depreciation start date%

Assi'n!ent of Depreciation Calculation Method to Depreciation key:

Select 7he depreciation key and click on Assi'n!ent of Calculation !ethods% 4o$ assi'n
different !ethods to depreciation key%


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