How it worksWhen 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: For example, if 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. 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 | 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. | 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.
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Enter the details for the journal. 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. [BCB:299:UKI - Personal content block - Dane:ECB] [BCB:300:UKI - Search override - Start UK:ECB] [BCB:276:UKI - hide back button:ECB] |