Come on guys! some fixed assets are used in production, so their depreciation is capitalized in inventory (Balance sheet), not expensed to the income statement.
Currently, you can only set income statement’s accounts as custom accounts for fixed assets depreciation.
Please fix this.
You can use journal entries to allocate depreciation for inventory items.
this may disfigure expense accounts and lead to mistakes, let alone the unnecessary double work
@Amir, how would you suggest depreciation expense of a fixed asset be allocated among inventory items? You certainly cannot post it simply to “inventory” as you suggest. It would have to be allocated to specific inventory items’ subsidiary ledgers in Inventory on hand.
That is because, by definition, depreciation is a current expense. And that depreciation expense is applied to a fixed asset, not to an inventory item, because it is the fixed asset that is being depreciated.
When depreciation is ultimately capitalized in an inventory item, it must be done on the basis of units produced. This could be handled in Manager by including non-inventory costs on production orders, effectively diverting those costs from the depreciation expense account. But the calculations involved must consider the production lifetime in units of the fixed asset.
There is nothing to fix, because nothing is broken.
Thank you for your reply, excuse my language, was typing in the middle of a horrendously busy hour, actually, the thing is, you don’t post depreciation to inventory directly, instead you use two sets of accounts to account for adding indirect (overhead) expenses to inventory in an environment that have a process of conversion of raw materials into finished inventory, these two sets of accounts are 1- Manufacturing overhead applied and 2- Actual overhead incurred (Both are balance sheet accounts)
the allocation of indirect manufacturing expenses (including depreciation) will be through: Dr inventory Cr manufacturing overhead applied, through a journal entry.
later when the actual overhead is incurred you Dr Actual overhead CR cash/Bank/Accounts payable/Accumulated depreciation…etc
so the need to be able to credit a custom balance sheet account for depreciation expense (not necessarily inventory) is a real and legitimate need!
attached is a screenshot of my balance sheet
I don’t follow your logic, @Amir. You started out asking about applying depreciation to inventory. Now you write about overhead. But overhead involves expenses, not accounts on the balance sheet. And everything you show in your screen shot looks like an expense. And depreciation is absent. So you need to explain more clearly what you are asking for. The closest you came was this statement:
You can already do that. First you have to create a suitable custom control account. Then you can edit your fixed assets to apply their depreciation to that account. Read this Guide:
Maybe taking a read at Depreciation | Explanation | AccountingCoach will clarify why depreciation is treated as an expense. The example give deals with purchase of a truck for 70,000. The estimated lifespan is 7 years. Rather than expending the asset in year one (i.e. expend 70,000 to purchase the truck) in linear depreciation that Manager uses it is expended over 7 years at 10,000 per year. Your P&L will reflect such.
In some situations, @eko, it is appropriate to incorporate depreciation expenses into the cost of inventory, such as when a particular machine is used only to manufacture specific inventory items. I think that is what @Amir is trying to do. But in those situations, you typically would depreciate the machine according to its rated lifetime in units produced. For example, a stamping machine might be good for 500,000 impressions. So your depreciation would be based on the number of stampings made during an accounting period, not the duration of the period, on the assumption that the machine becomes less valuable only when used to make an impression.
But the depreciation itself is still an expense. And my point has been that the way to include the depreciation in the value of inventory is as a non-inventory expense, transferring the expense from the expense account where it is initially posted to the units of the inventory item produced. @Joe91 suggested doing that with a journal entry. I suggested doing it as part of the production order. Same result.
Regardless, there is no valid reason to post depreciation directly to the balance sheet, because it is first and foremost an expense.
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@Tut, Thank you for the explanation, makes lots of sense.
Thank you both, Now bear with me:
We do manufacturing of homogenous mass-produced items, The costs to capitalize on these items when the production process is finished, according to international financial reporting standard ‘‘IAS 2’’ are to compose of, and only off:
1- Direct Materials used
2- Direct labor used
3- Manufacturing overhead, which is composed of:
A- indirect materials used
B- indirect labor used
C- other manufacturing expenses (like: electricity at the factory, DEPRECIATION of manufacturing
machinery, plant security, factory insurance…etc)
As you can see from the above (you can also revert to IAS 2: Inventories), Machinery depreciation must not be expensed to the income statement directly, instead, it should be capitalized in inventory and later be expensed in the income statement as part of the cost of goods that are SOLD.
then why do we need to post depreciation into the balance sheet?
As you know, it is not practical to calculate the cost of several items (like depreciation or monthly salaries, or electricity) on a daily basis, but, production is a daily process!!
the solution to the above dilemma is like the following: you will estimate these expenses and apply them to the production as it happens, with the following journal entry:
DR production in process/finished goods inventory 3,000
Cr applied overhead - electricity 1,000
Cr applied overhead - depreciation 1000
Cr applied overhead - factory insurance 1,000
When the period (full month) ends, you will be able to calculate the actual cost of the overhead, and it will be with the following journal entries:
Dr Actual overhead - 3,000
CR cash - payment for electricity 1,000
Cr ACCUMULATED DEPRECIATION - being full month depreciation 1,000
CR Prepaid factory insurance - being immoritization of one month 1,000
both accounts: applied and actual overhead are opened under a larger group in the balance sheet called: Manufacturing overhead, so they can net off each other.
that’s why one will need to be able to post manufacturing machinery and facility depreciation to the balance sheet.
if there are any cost accountants or ppl with accounting for manufacturing can back up this.
and thank you.
This is not true. The requirement only says manufacturing overhead includes depreciation, not that depreciation is not an expense.
As I already told you, you can do that currently. I see you did not visit the link I gave you, which explains how.
I will have to disagree here, the cloud version is still not allowing you to choose a custom account for the depreciation that is in the balance sheet, you can only choose accounts from the income statement as custom depreciation accounts.
As to what you said about depreciation being not an expense, let me tell you this: expense differs from cost, when depreciation is for manufacturing machinery and or manufacturing facility it will initially be classified as cost, not expense. it will remain in the balance sheet as a cost until the inventory that it has been capitalized into is sold, then, when the inventory is sold all of its costs (including manufacturing overhead which in turn includes depreciation for manufacturing machinery) will be expensed in the income statement.
the solution to this is simple: allow the option to choose a custom account for depreciation that belongs to the balance sheet (now all custom accounts you can choose belong to the income statement).
Please read post #6 again. I wrote, “First you have to create a suitable custom control account. Then you can edit your fixed assets to apply their depreciation to that account.” [Emphasis added.] The option does not appear until the custom control accounts made up of fixed assets have been created. When you have done that, the fixed asset entry form will include:
Every account in those dropdown menus will be a balance sheet account, because all custom control accounts are balance sheet accounts.
You are mischaracterizing the accounting transaction sequence. This is what should happen (and will happen when the procedure I have described is followed):
- Depreciation is debited to a depreciation expense account and simultaneously credited to an accumulated depreciation balance sheet account. This is what the depreciation entry does. The accumulated depreciation account is a contra asset account that offsets the acquisition cost of the fixed asset, resulting in a net book value that declines with each depreciation entry.
- The inclusion of non-inventory costs (in the form of depreciation expense) on a production order credits the depreciation expense account and debits Inventory on hand for the inventory item being produced. At this point, your depreciation expense has been converted to an asset.
- When the inventory item is sold, its value in credited to Inventory on hand and debited to Inventory - cost, thereby transferring the cost of goods sold, including the depreciation from the production order, back to the profit and loss statement as an expense.
Your suggestion is effectively a direct debiting of the Inventory on hand account, with no balancing credit. If your suggestion were implemented, nothing would ever be posted to the accumulated depreciation account, so the book value of the fixed asset would never decline, yet depreciation would magically be included in the value of Inventory on hand. That is a contradiction of the fundamental balancing principle. Your books would never balance.
I completely agree with @Tut that using Production Orders to allocate depreciation costs to inventory is the correct approach to be followed.
I can think of two reasons why:
-
All the costs of production are allocated in a single process, which is not only tidier but much easier to manage.
-
This produces a more accurate cost figures. Suppose you produced 2000 units, 200 of them were scrap and 200 were test batches. If we keep things simple, your method @Amir would allocate 2000-unit worth of depreciation to inventory – which is wrong since 200 need to be written-off and 200 will be an expense (R&D or something).
Not to say that there aren’t alternative approaches where your method might yield the correct result but as an accounting software, Manager has to provide users with the simplist and easiest methods to get things done.
But I also believe that no method is perfect, no single approach could work in all situations and accordingly, Manager should allow for alternate work flows if a single solution isn’t possible.
In order to further your case @Amir, you can start with the current method and describe in detail how it fails to yield the correct results in your case. Then it’s up to the developer to decide whether the benefits from any proposed changes justifies the additional complexity.
@Amir, what @Ealfardan is saying here is that it is unlikely that the developer will open up the custom depreciation expense account to enable selection of a Balance Sheet account, unless you can demonstrate with examples why this would be advantageous to the majority of users. Similar requests to this have been unsuccessful in the past.
Viz.
@Amir, your posts give an explanation of the method that your business has probably used over a number of years and is probably as a result of advice received from accountants/auditors. I cannot give an opinion as to whether it is a correct procedure or not, as there has not enough information given.
Presuming that it is correct, then, I think that your solution is to use custom control accounts for fixed assets for both your manufacturing machinery and manufacturing facility. This will enable you to select separate custom depreciation expense accounts for these assets to allow you to periodically journal this depreciation to the balance sheet overhead accounts so that it is there to apply to cost of goods sold and is eliminated from the P&L statement.
It may also be helpful to investigate (using a Manager.io test business) some of the methods that Manager.io has built in for the allocation of overheads to manufactured items that other forum members have suggested in this thread.
actually, the method tut described is working perfectly, all I had to do is create a new custom control account in the balance sheet, and then I assigned the depreciation to it.
thank you @Tut
Manager is fully capable of keeping the books of a manufacturing facility.