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OF DEPRECIATION AT LG ELECTRONICS
Straight-Line Depreciation
This method uses the estimated salvage value (scrap value) of an asset at the
end of its life and then subtracts that value from its original cost. The difference is
equal to the value that is lost during the asset's productive use. Once figured, this
number is divided by the management's best-guess estimate of the number of years
that the asset will be useful.
Usually, the declining balance method applies a higher depreciation charge to the first
year of an asset's life and then gradually decreases depreciation expenses for future
years.
Units of production assigns an equal expense rate to each unit produced, which
makes it most useful for assembly or production lines. The formula involves
using historical costs and estimated salvage values and then determining the expense
for the accounting period, multiplied by the number of units produced.
Depreciation Calculation Methods
Various depreciation calculation methods are mentioned below:
i. Base Method
ii. Declining Balance Method
iii. Maximum Amount Method
iv. Multi Level Method
v. Period Control Method
Base Method
Base Method- SPRO> IMG> Financial Accounting (New)> Asset
Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation
Methods>Define Base Methods
Base method primarily specifies:
This method involves applying the depreciation rate on the Net Book Value
(NBV) of asset. In this method, depreciation of the asset is done at a constant
rate.
In this method depreciation charges reduces each successive period.
This method should be used in those assets, where high depreciation should be
charged in initial years.
Assume the price of a depreciable asset i.e. computer is Rs. 40,000 and its
salvage value after 10 years is 0.
In this method NBV will never be zero.
There are some standard methods that has been provided by SAP e.g. Pro rata at
mid period, Pro rata at period start date, at the start of year or At mid year etc. E.g., If
client requires to depreciate an asset from the First day of the year in which the asset
is capitalised, we can use the method `At the start of the Year` in case of Acquisition.
This method has been explained with the help of one comprehensive example
below:
1. In case of Asset Acquisition: Depreciation should start from the First day of
the year in which asset is acquired.
2. In case of Asset Addition: Depreciation should start from the Ist day of
period of date of addition.
3. In case of Asset retirement: Depreciation should be charged upto Mid period
regardless of date of retirement.
4. In case of Asset Transfer: Depreciation for the full year should be charged
by the transferee company.
After having knowledge of all the depreciation calculation methods, we can
assign the depreciation calculation methods to the depreciation key.
Creation of Depreciation key:
Asset accounting module of SAP calculates the depreciation on Assets based
on the configuration done for Depreciation key. Depreciation Key basically
contains the calculation methods which in combination control the following:
Period for which Depreciation is charged
Method of Depreciation
Scrap value, if any
Planned change in Method of Depreciation
We enter a separate depreciation key for each depreciation area in the asset
master record.