If there is one thing we can be sure of, one milonga says, it is that only time is eternal. The rest of what is to be done, its days are numbered.
Since this is accounting, we have no choice but to agree: neither the device you use to text a customer, nor the car you travel in to visit them last forever. Like everything in this world, the resources you work with are subject to the final judgment of time.
We’re beating around the bush, yes, but this deterioration of things must also be taken into account. At least when we run a company. Let’s see: Your company consists of funds or resources that ensure its long-term operation. It’s what we call long-term assets, fixed or simply immobilized.
What is immobilized?
We recently talked about her. Property, plant and equipment are assets, i.e. assets and rights that ensure the long-term operation of the company. We distinguish them from current or current assets, which we are not concerned with now.
And because? Since they only have a short term of less than a year and are for sale, we don’t have to worry about their long-term value.
Fixed assets or fixed assets, on the other hand, as long-term resources that cannot be sold, require a major investment, they are vital to the operation of the business, and the loss in value must be quantified so that the accounts do not go away. of hands
When it comes to fixed assets, we are talking, for example, about the furnishings in your office, the company car, the mobile phone and the computer, but also the machinery or the license for a computer program.
Why are they declining in value? There are several factors, but in accounting they are reduced to three:
- Physical: caused by the simple passage of time even when not used.
- Functional: Each good degrades based on the use we give it.
- Economic: Technological innovations make a good obsolete.
Accounting, we are interested in calculating this depreciation. The truck you bought for 50,000 euros will not have the same value at the end of its life. And this calculation is called depreciation or amortization.
Do we write off or amortize?
Strictly speaking, depreciation and amortization are not the same thing. Although both refer to the same calculation and relate to fixed assets, in accounting the concept of depreciation is reserved for intangible assets due to their intangible nature (patents, licenses, trademarks, transmission rights etc.) and the concept of depreciation is reserved for tangible assets. due to their material nature (furniture, equipment, machines, etc.).
Both distinctions are useless to us, so we will use both concepts interchangeably.
How do you calculate the depreciation of an asset?
As we said, your company’s assets are depreciating, and that depreciation, not to get too lyrical, is quantifiable. how much are we talking about To know how much, you must first consider the following factors:
- The depreciation value. It is the price at which you bought the good.
- Useful life. It is the estimated time this asset will last.
- Residual value. It is the value it will have at the end of its useful life.
Like everything in accounting, an example will help us understand it. Let’s say we are great bakers who bought a van to deliver bread home. We paid about 50,000 euros for the van. Its useful life is 15 years and its residual value is 5,000 euros.
To calculate your depreciation, you would use the following formula:
Annual Depreciation Fee = Initial Amount – Residual Value / Years of Use
In other words: 50,000 – 5,000 / 5 = 9,000 euros are the annual depreciation costs. Or to put it another way: the annual loss in value is the equivalent of 9,000 euros.
This method that we used is known as the linear method. There are others that are more complicated and precise. But as in Debitoor, a billing and accounting programwe bet on simplicity, we present you the one that best suits us.