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Depreciation is a method of allocating the cost of a fixed asset over its estimated useful life. Governmental and proprietary fund types need to be depreciated.
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So if an item has an original cost of $10,000 with an estimated useful life of 5 years and a salvage value of $1,000, it would have an annual (FTD) depreciation of $1800 computed as follows:
| End of Year | Original Cost | LTD Depreciation | Book Value at Beginning of FY | Yearly (FTD) Depreciation | Book Value at End of the Fiscal Year |
|---|---|---|---|---|---|
| 1 | 10,000 | - | 10,000 | 1,800 | 8,200 |
| 2 | 10,000 | 1,800 | 8,200 | 1,800 | 6,400 |
| 3 | 10,000 | 3,600 | 6,400 | 1,800 | 4,600 |
| 4 | 10,000 | 5,400 | 4,600 | 1,800 | 2,800 |
| 5 | 10,000 | 7,200 | 2,800 | 1,800 | 1,000 |
| Result | 10,000 | 9,000 | 1,000 | 0 | 1,000 |
However the Inventory application uses a slightly different calculation from the straight-line method.The total depreciation as of the end of the last fiscal year (called Life-to-date Depreciation) is stored for each item. The system uses the following calculation for annual depreciation. The depreciation for a part of a year will be the annual depreciation pro-rated for the number of months involved.
This formula protects the calculation from being sensitive to changes in original cost, life expectancy, etc. Thus, if an improvement (additional acquisition) is done to an item, the amount of depreciation taken from that point on will reflect the increase or decrease to the original cost. Depreciation already taken in prior years will not be affected. Listed below are two examples of calculating depreciation for the life of the items.
Tag #1: $10,000 original cost depreciated over 5 years acquired 01/01/2015 (FY15) with a salvage value of 1000.00. The item should be completely depreciated in five years.
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Tag A's original cost is $5000 depreciated over 5 years. The yearly depreciation is $1000. If in year 4, I create an additional acquisition thus updating the original cost to $7000, my yearly depreciation for the remaining life of the asset is now $2000. It will not disturb prior year depreciation.
| Year | Original Cost | Life | Yearly Depreciation |
|---|---|---|---|
| 1 | $5000 | 5 years | $1000 |
| 2 | $5000 | 5 years | $1000 |
| 3 | $5000 | 5 years | $1000 |
| 4 | $7000 | 5 years | $2000 |
| 5 | $7000 | 5 years | $2000 |
Running Deprecation Option
If in year 4, I run depreciate on Tag A, it will recalculate LTD depreciation from scratch using the current original cost of $7000
| Year | Original Cost | Life | Yearly Depreciation |
|---|---|---|---|
| 1 | $7000 | 5 years | $1400 |
| 2 | $7000 | 5 years | $1400 |
| 3 | $7000 | 5 years | $1400 |
| 4 | $7000 | 5 years | $1400 |
| 5 | $7000 | 5 years | $1400 |
As you can see, the original tracking of depreciation on the life of the asset is altered. It is recommended that you contact your ITC or discuss with your auditors before using the Depreciate option.