Depreciate an asset

Summary

How to record the depreciation of fixed assets in Sage Accounting

Description

What is depreciation?

It's important to know how much your business is worth. This includes the value of the assets you hold. For example: vehicles or equipment. It's important that you know how much your assets are worth at any given time.

As your assets get older, their value usually decreases. We call this Depreciation.

Make sure the value of your assets is correct in your accounts. Record when the value has depreciated. Do this at regular intervals.

Resolution

How it works

When you purchase an asset, such as a company car, the value of the car is on your balance sheet. Over time the value of the car decreases. This reduction in value, or depreciation, is a cost to your business. It needs to appear on the Profit and Loss as an overhead.

To record this in Sage Accounting, enter a journal for the depreciated amount each period.

For example: Your company car reduces in value by 100 per month. Create the following journal:

Enter a Credit for €100 against the relevant asset ledger account. This reduces the total value of the asset.
Enter a Debit for €100 against the relevant depreciation ledger account. This adds the cost of the reduced value (depreciation) as an overhead (debit) on your profit and loss.

Depreciation methods

There are various methods of recording depreciation. The two most common methods are straight line or reducing balance. If unsure which method to use or need more help calculating depreciation, check with your accountant.

Straight line depreciation

Using this method, the asset’s value reduces by a fixed value every year until it reaches zero. For example, if an asset worth €10,000 depreciates at 25% a year, the depreciation is as follows:

Year	Cost price	Depreciation rate	Depreciation amount	Current value
Year 1	10,000	25%	2,500	7,500
Year 2	10,000	25%	2,500	5,000
Year 3	10,000	25%	2,500	2,500
Year 4	10,000	25%	2,500	0

Reducing balance depreciation

Using this method, the assets reduces by a fixed percentage of its current value each year. The current value never reaches zero. But for practical purposes, you may want to write it off when it reaches a certain value. You can also write it off after a specific period of time. Using the same example, the depreciation is as follows:

Year	Cost price	Depreciation rate	Depreciation amount	Current value
Year 1	10,000	25%	2,500	7,500
Year 2	10,000	25%	1,875	5,625
Year 3	10,000	25%	1,406	4,219
Year 4	10,000	25%	1,054	3,165

Set up Depreciation Ledger accounts

To record depreciation journals, make sure you have set the correct ledger accounts.

We have set up the following default ledger accounts for you. If you have other types of fixed assets you may need to set up similar additional accounts.

Default ledger accounts

Nominal Code	Ledger Name	Category	Category Group	VAT Rate
0011	Property -Accumulated Depreciation	Fixed Assets	Asset	No VAT
0021	Plant and Machinery -Accumulated Depreciation	Fixed Assets	Asset	No VAT
0031	Office equipment and IT – Accumulated Depreciation	Fixed Assets	Asset	No VAT
0041	Fixture and fittings – Accumulated Depreciation	Fixed Assets	Asset	No VAT
0051	Motor Vehicles – Accumulated Depreciation	Fixed Assets	Asset	No VAT
8010	Property Depreciation	Depreciation	Expenditure	No VAT
8020	Plant and Machinery Depreciation	Depreciation	Expenditure	No VAT
8030	Office equipment and IT Depreciation	Depreciation	Expenditure	No VAT
8040	Fixture and fittings Depreciation	Depreciation	Expenditure	No VAT
8050	Motor Vehicles Depreciation	Depreciation	Expenditure	No VAT

Record depreciation journals

Enter the depreciation as a Credit value against the relevant Fixed Asset ledger account. This reduces the value on your balance sheet.

Enter a Debit value against the relevant Depreciation ledger account. This adds depreciation as a cost to your business.

From Adjustments, select Journals and New Journal.

Enter the details for the journal.

Enter a Credit value to the depreciation ledger account set up with the Fixed Assets category. This is to make sure this value appears in the right place on your balance sheet.
Enter a Debit value to the depreciation ledger account set up with the Depreciation category. This is to make sure the value appears in the right place on the profit and loss.

For example, if the asset is a car and it depreciates by €100, post the following journal :

Ledger Account	Details	Debit	Credit	Include on VAT Return?
Motor Vehicles Accumulated Depreciation (0051)	Motor vehicles depreciation		100.00	No
Motor vehicles Depreciation (8050)	Motor vehicles depreciation	100.00		No

Select Save.

Your balance sheet will now show the original value of the asset and the amount it's depreciated by. This makes the current net worth when added together.

Your profit and loss will show the depreciation as an expense to the business.

Solution Properties

Solution ID: 222001000100813
Last Modified Date: Thu Mar 21 16:20:11 UTC 2024
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