After capturing Asset Acquisition, the next step will be to define the Cost Management – Depreciation/Amortisation. This simply means determining the cost and value of asset within a set lifespan. Let’s say an Asset Acquisition was $10,000 and expected life span is 5 years and savage value (what you think the asset will worth at the end of lifespan) is $1,500. That means the balance $8,500 will be depreciated throughout the lifespan (5 years). How these are done in various scopes (Straight-Line, Declining Balance, Sum of Year Digits) is what we will explain here.
To start, click the ‘Costs Mgt’ button on an Asset dashboard. The Cost Management page opens, note this process can only be done once on an assets, all depreciated values of a lifespan are defined at auto-performed into the ledger on each fiscal year. Click ”New” to start.
In the above, the Purchased amount is automatically listed (from the Acquisition). Decide on the Expected useful years (lifespan), savage value (the amount you assume the asset will worth after the lifespan), then select either Depreciation (for tangible assets) or amortisation (intangible) assets, then select the scope.
About Scope
The Cost Scope is the Depreciation methods for calculation. It could be either Straight-Line, Declining Balance of Sum-of-Digits. These different methods exist for calculating depreciation, each offering a different approach to spreading the cost and reflecting the decrease in asset value.
Straight-Line: The straight-line method spreads evenly, the cost of an asset over its lifespan, resulting in a consistent annual depreciation expense. Example, Asset Acquisition was $50,000 with a lifespan of 10 years, and its salvage value as $5,000.
| Assets Costs | $50,000 |
| (-) Salvage value | $5,000 |
| Net Assets value after salvage value | $45,000 |
| Total Useful years | 10 Years 0 |
| Depreciation Expense = (Asset Cost – Salvage Value) / Useful Life ($50,000 – $5,000) / 10 | $4,500 per Year |
Formula: Depreciation Expense = (Asset Cost – Salvage Value) / Useful Life
Declining Balance: The declining balance scope allows for higher expenses in the early years. It uses a fixed depreciation rate applied to the carrying value: the assets cost minus accumulated depreciation. This method recognizes the accelerated decline in value. Use same example as above:
| Opening Value of Assets | Depr Rate | Depr Expenses | Amount after depr | Accumulated Depr | Closing Value of Assets |
| $ 50,000 | 40% | $20,000 | $30,000 | $20,000 | $30,000 |
| $ 30,000 | 40% | $12,000 | $18,000 | $32,000 | $18,000 |
| $18,000 | 40% | $7,200 | $10,800 | $39,200 | $10,800 |
| $10,800 | 40% | $4320 | $6,480 | $43,520 | $6,480 |
| $6,480 | 100% | $6,480 | —– | $50,000 | —– |
Formula: Depreciation Expense = Opening Book Value * Depreciation Rate
NOTE: As at this time, Profitaa only support the Straight-Line and Decline Balance scopes of Depreciation.
After selecting the Scope, click the “Cost of Breakdown”. This will display the Depreciation breakdown according to the Scope selected. If you have settled with the desired breakdown, click the “Accept, Create Cost” button to create costs.
This is what happens next:
1. Costs breakdown will be saved and depreciation for current fiscal year will be auto inserted into your ledgers in the appropriate Chart of Account Entries – make sure you have defined all your account entities under ‘Account Binding’ in Account Module. The Costs for subsequent lifespan will be auto inserted into the ledgers in the fiscal years.
2. Entries will be saved to Asset Ledger
No actions are required for these.
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