Who determines the meaning of the repo rate
What does depreciation mean?
Every good in a company is associated with acquisition or production costs or wears out at some point. The principle of depreciation stipulates that part of the acquisition costs may be deducted from tax each year. The depreciation takes place over the years of use.
Table of Contents
- Depreciation definition
- Why does it have to be written off?
- The depreciation methods of the overview
- What is a depreciation table?
- How are low-value assets written off?
- What are attributions?
The vast majority of assets in a company only have a limited useful life. They are subject to natural wear and tear. This also applies to assets that are worth a lot and therefore have high valuesacquisition cost orManufacturing costs are connected.
TheDeposition these high costs are explicitly regulated in commercial law and tax law. The principle of depreciation states that each year only onepartthe acquisition costs of an asset may be deducted from tax or recorded in an income statement and in the annual financial statements of a company. This depreciation takes place via theYears of use - the so-called "depreciation for wear and tear", which is often the abbreviation hereDepreciation used.
For a scheduled depreciation of an asset, there are tables, the so-called depreciation tables, which exemplify the useful life of various assets.
Why does it have to be written off?
Depreciation according to the Income Tax Act
Depreciation arerequired by law. According to Section 7 (1) sentence 1 EStG (Income Tax Act), for assets that are intended to be used to generate income and that, according to experience, are used for more than a year, the acquisition and production costs must be evenly distributed over the years of useful life.
The acquisition and production costs for depreciable assets must not fall below a certain level. Theeven distribution the depreciation over the period of use makes it clear that thelinear depreciation represents the legal rule. The one that was also used earlierdeclining balance depreciation may no longer be applied to assets acquired after 2010.
Depreciation according to HGB
The valuation principles of theCommercial Code (HGB) for the assets reported in the annual financial statementsscheduled depreciation for companies.
! Section 253 (3) sentence 1 of the German Commercial Code (HGB): "In the case of fixed assets, the use of which is limited in time, the acquisition or production costs are to be reduced by scheduled depreciation."
↓ Depreciationreduce hence the profit of a company, even if no acquisition costs or manufacturing costs were actually incurred in a particular year.
↑ The principle of depreciationelevatedon the other hand, however, theYear of purchase related profit. Because this year the cost of purchasing the property cannot be fully assessed.
Alsobusiness management make sense of depreciation: Every year the company can put aside an amount that is needed for the production or acquisition costs of new assets if the depreciated items can actually no longer be used. Depreciation is also used toDepreciation to be recorded by wear and tear in fixed assets and current assets in accounting.
➜ This includes above allscheduled, but also in exceptional casesunscheduled Depreciation.
The depreciation methods in the overview
- Linear depreciation: Standard form of depreciation in tax law and accounting law. Recognition of the impairment with annual amounts.
- Declining balance depreciation (Book value depreciation): Recording of the impairment through depreciation with continuously decreasing annual amounts. The declining balance depreciation is only permitted for assets that were purchased before December 31, 2010.
- Direct depreciation: Posting technique in which the asset account is reduced by the depreciation.
- Indirect depreciation: Posting technique that depreciates via a liability item ("value adjustment").
- Performance-related depreciation: Depreciation method for capital goods, the performance of which has been shown to fluctuate considerably.
- Scheduled depreciation: Depreciation over a certain useful life, which is determined in advance and is partly based on legal requirements (depreciation tables).
- Extraordinary depreciation: Recording of wear and tear that is not caused according to plan.
- Imputed depreciation: Calculation of the actual consumption of value.
Straight-line depreciation and declining balance depreciation
A basic distinction is made between straight-line depreciation and declining balance depreciation.
Thelinear depreciation can be visualized as a linear, declining function: The curve goes down a straight path and at some point reaches the zero point. The depreciation amounts are includedthe same every year.
Thedeclining balance depreciation on the other hand has the consequence that the individual amounts for the depreciationevery year less fail. Because here the rate for the depreciation is always based on the current oneResidual book value- which in turn falls through the depreciation every year. Large amounts can be written off, especially in the initial phase of use. The degressive depreciation is, however, an obsolete model: since 2011 it has no longer been allowed to be used. It is currently only possible for assets that were acquired by December 31, 2010.
- Linear depreciation: Assets are depreciated in constant amounts over the years of their useful life.
- Declining balance depreciation: The amounts of depreciation per year are steadily decreasing.
Example of straight-line depreciation
A is a self-employed programmer and in 2015 bought a larger computer system for his company.
Theacquisition cost for the computer system (without taking sales tax into account)€ 2.700,-.
❓ How is this asset written off?
➜ A goes fromthree years of useful life of the system (depreciation table 220.127.116.11). It is important here that the depreciation also depends on the month of 2011 in which the acquisition was made:
Acquisition in January 2021
If A is the computer system inOctober 2015 purchases, the deduction for wear and tear is reduced for 2015 in accordance with the useful life:
Acquisition in October 2021
Example of a declining balance depreciation
A bought an office desk in January 2021.
- Acquisition costs: € 1,800.00
- Planned useful life: 10 years, therefore the straight-line depreciation rate: 10 percent
In thedeclining balance depreciation all individual depreciations are always based on the respectiveresidual value. The individual depreciation rate may be 2.5 times higher per year, but not higher than 25 percent.
A chooses this depreciation rate because he wants above allvery high amounts at the beginningcopy. Because the desk was purchased before December 31, 2010, declining balance depreciation is still permitted.
Therefore, this depreciation results for the following years:
Since the declining balance variant is always depreciated from the residual value, a full depreciation is not possible. In principle, the declining balance depreciation never ends becausenever the residual value € 0, -is achieved. Therefore, A can switch to straight-line depreciation. Two sizes are now decisive for this:
- Residual book value (€ 320.36)
- Remaining term (another 4 years)
- € 320,36 / 4 = € 80,09
- From 2027 to 2030, € 80.09 must therefore be written off each year.
AChange from degressive to straight-line depreciation is only possible once. Once you have decided on a transition to straight-line depreciation, this must be carried out until the end of the useful life.
The arithmetic-degressive depreciation
In addition to this form of degressive depreciation (geometric-degressive depreciation), there is also arithmetic-degressive depreciation. Arithmetic-degressive depreciation guarantees that at the end of the useful lifeno residual book value there is more. This is done by using this method of depreciation to reduce the depreciation amounts by a fixed amount each year.
However, this cost calculation is not permitted for tax purposes. But it can be in oneCost accounting can be applied to take into account the wear and tear of an asset.
Direct and indirect depreciation methods
When it comes to the depreciation methods used in accounting, a basic distinction is made between two posting techniques: direct and indirect depreciation.
➜ Direct depreciation method: Reduction of the asset item on theActive side
➜ Indirect depreciation method: Reduction of the asset item on thePassive side
While both methods reduce profit and equity by the same amount, the decisive one liesdifference This depreciation means that in the case of direct depreciation, the original acquisition costs are reduced directly - by the current depreciation. This is different with indirect depreciation: Here all depreciations are collected and asAllowance shown - negative on the assets side and positive on the liabilities side.
At aDepreciation according to performance is depreciated depending on the use of an asset. Especially with fixed assetsstrong fluctuations in use performance-related depreciation makes sense. They are useful for vehicles, for example.
Example of a depreciation based on performance
The starting point for the depreciation of a truck is a total mileage of250,000 kilometersaccepted. The depreciation of a truck used for€ 100.000,- was acquired, is therefore0.40 euros per kilometer (€ 100,000 for 250,000 km). In the case of this asset, the mileage takes the place of the useful life. At the end of the year, the kilometers actually driven are used for the depreciation of the truck.
- With 40,000 kilometers in one year, this results in a depreciation amount of € 16,000 (40,000 km × € 0.40).
! Attention: A depreciation is based on performance instead of useful lifesubject to approval. In addition, the annual mileage mustproven become. For this purpose are particularly suitableLogbooks.
With theunscheduled depreciation impairments are recognized in a company that are not caused by scheduled use. Reasons for this can in particular be:
➜ Damagecaused by accidents or other causes,
➜ Fluctuations in external values, for example due to significantly falling market values,
➜ Devices that technical very quicklyobsolescence.
Special features of unscheduled depreciation
While there is basically no technical difference between unscheduled and scheduled depreciation of goods in accounting (although different account names have to be selected for this), there are some special features. The unscheduled depreciation is not only in the case of assets, but also in theCurrent assets possible.
In addition, every unscheduled depreciation must also be recorded under extraordinary expenses. This is to indicate that the depreciation was not caused by normal business operations, i.e. not based on the expected useful life. In tax law, unscheduled depreciation is classified asPartial depreciation designated.
Example of unscheduled depreciation
A company owns a special machine that was purchased specifically to manufacture cardboard boxes for a specific customer. This customer goes bankrupt. A special depreciation is made:
See also the example below for attribution.
In contrast to the depreciation on the balance sheet, theImputed depreciation with theactual consumption of property, plant and equipment. Tax law or accounting aspects do not play a role in imputed depreciation.
Imputed depreciation makes sense because a company incurs actual costs that do not appear when calculating profits and losses. But they become important when it comes to costing in cost accounting. Imputed depreciation is not evident from the annual financial statements under commercial law.
What is a depreciation table?
Anyone who does not know how many years of useful life must be set for individual assets can use so-called depreciation tables. These are fromFederal Ministry of Finance published. However, they only represent and are an aidnot legally binding. In individual cases, the entrepreneur can deviate from the useful life specified in these tables. According to the type of assets, these tables are structured as follows:
- Fixed assets (immovable)
- Land facilities
- General operating facilities
- Machining and processing machines
- Operating and office equipment
- Other assets
Examples from the depreciation table
Ideally, the periods of wear and tear in the depreciation tables correspond to the actual useful life, i.e. the time in which assets are used to generate sales. The depreciation tables are based onTax audits at companies and are therefore very meaningful.
! Rule of thumb: The higher the purchase or production value, the longer the useful life. A few examples from the depreciation table on the useful life make this clear:
Depreciation in accounting: postings
In accounting, depreciation depicts the decrease in value or the "consumption" of assets until they are completely written off. Asexpenditure depreciation reduces the company's profits. Regulations on this can be found in the Commercial Code, in particular in Section 253 of the German Commercial Code (HGB), Paragraph 3 of the German Commercial Code.
Important formulas for depreciation in accounting
The main formula calculates the amount that each yearlinear is to be written off:
- Amortization per year = acquisition costs (production costs) / planned useful life in years
If the asset is not purchased at the beginning of the year, the following formula applies to the first year:
- Depreciation amount in the first year = annual depreciation amount × months of use / 12
In thedeclining balance depreciation (a discontinued model in accounting) the following formula applies:
- Depreciation amount = depreciation rate (in percent) × book value of the previous year
Examples of posting rates for depreciation
A company buys a vehicle for € 50,000. The debit is therefore posted to an active stock account:
In the case of straight-line depreciation over five years, the following is posted to the asset account with the designation vehicle fleet:
The balance of the fleet account is therefore reduced by € 10,000 each year. This goes on until the asset is no longer available - normally five years. The “depreciation” account, on the other hand, increases every year and lowers the company's profits.
How are low-value assets written off?
GWG - this abbreviation stands forlow-value assets. Naturally, GWGs also have a limited useful life and are therefore subject to impairment. Yet apply to themspecial provisions about depreciation. For example, in the accounting department of a companyCollective item are formed by GWG, which are written off together. In detail, the following applies to depreciation of LVA:
- At acquisition costunder € 150, - it concerns GWG, which are immediately depreciated 100 percent.
- With acquisition costs between€ 150,- and€ 410,- there are two alternatives:
- Depreciation in the year of acquisition100 percent
- Depreciation asCollective item over five years
What are attributions?
In commercial law, accounting law and tax law, write-ups are thatCounterpart to the depreciation. youincrease the book value of an item from the business assets, while depreciation reduces the book value. Write-ups are also madeWrite-ups called.
⚊ Depreciation: negative Change in value
✚ attribution: positive Change in value
An attribution therefore has the consequence that through thehigher valuation more can be written off annually. An attribution can be differentcauses to have:
- The value of an asset increases without changing its substance.
- Excessive depreciation from previous accounting periods must be corrected.
Special features of write-ups
Since write-ups in contrast to write-offs in accounting and tax law are aexceptionthere are special features to be observed here:
! Commercial law upper limits must not be exceeded (§ 253 HGB).
! In tax law, assets that were already allocated to fixed assets in the previous year must be recognized at amortized cost in the following years. An exception only applies if the taxpayer applies a lower partial valueprove can.
! Acquisition cost principle: A write-up is permitted up to the amount of the original acquisition cost.
Example of an attribution
For this example, see the initial situation above (unscheduled depreciation). Now the company is gaining a new customer for the acceptance of the boxes. Therefore the machine can be used again:
The author of this article is Ertan Özdil, CEO, founder and partner of the cloud ERP provider weclapp.
Please note the legal information on this article.
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