Depreciation and amortization ratings

Welcome to the new features :slight_smile:

Does depreciation refer to fixed assets, and amortization to intangible assets? Is there any reason for this difference in terminology in English?

Yes. I don’t know why the two terms came into common use, because they basically accomplish the same thing. But there are a couple reasons they are usually distinguished instead of being lumped together:

  • Tax laws often allow accelerated depreciation, but frequently only straight-line amortization.
  • Salvage or residual value is often deducted from fixed assets before calculating depreciation, while intangible assets are more often expected to be worthless after amortization.

Having said that, it is also worth noting that the techniques for the two processes can be identical and practices used for one are sometimes applied to another. I think the real reason they are usually distinguished is that referring to one or another within a given business environment often conveys whether the asset is fixed or intangible, as well as the probable method of recovering its cost.

Tut is right. However, being more precise: An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property such as patents, trademarks, and copyrights, are all intangible assets. Fixed assets may include things such as land, computers, vehicles, plant, building, equipment, and [sometimes] inventory.

There are sometimes differences in the fixed versus intangible classification for certain types of assets, the reasons for which are somewhat obscure. For example, software that forms part of a computer operating system, or is embedded, is a fixed asset (usually lumped together with the computing asset), but software programs that can be moved from one system to another are intangible assets.

The term amortization is usually applied to intangible assets, but I have often seen the terms amortization and depreciation used interchangeably in public listed company accounts, depending on the jurisdiction. Whether fixed or intangible, the depreciation methods may be the same. Both, however, may be subject to revaluation, but more likely intangible assets because of often their nature even though they may have a monetary value paid initially. In fact, amortization is often not applied to goodwill, but the goodwill is subject to annual review and amortization if an adjustment is required.
For example, I have seen a significant part of goodwill (e.g. the value paid for an acquired company above the nominal net asset value) written off (impaired) in a single year in the Profit & Loss statement because of changed circumstances.

As Tut notes, the tax treatment for these different assets may vary, again according to jurisdiction. The depreciation and amortization rates may differ between the management and tax accounts (in public listed companies, this will usually be shown in the tax reconciliation note and accompanying policy statements).

Cheers… Richard

1 Like

Thanks for the clarification!

I have waited so long for the new depreciation and now it was worth the wait
Thank you Thank you Thank you

Does this work for monthly depreciation?
If I run the worksheet for a moth period (30 days) it will not estimate properly the depreciation after 12 months …

I will try to make my case… with the example below for 12 months depreciation with 100% rate…
Or what am I doing Wrong…?

example:

1 Like

@repeted, have you read the Guide: https://www.manager.io/guides/25021?

Yes I have…

And that is why I tell you it will make wrong calculations… (like the simulation above)

quote from that guide:
"The calculation worksheet bases calculations on book values of fixed assets on the first day of the defined period. "

Your hypothetical example calculates straight-line depreciation on the initial asset value over a 365 day period on a daily basis. That is why, for example, your Month 12 depreciation is the same as your Month 1 depreciation—both months have 31 days. And your spreadsheet deducts that monthly depreciation from the previous month’s book value. If you read the linked Guide again, you will notice the yellow Caution statement at the beginning that clearly tells you the Depreciation Calculation Worksheet cannot be used for the method you are using.

As clearly explained by the Guide, Manager’s worksheet calculates depreciation on a declining balance using an annual percentage rate, prorated over the period for which the worksheet is calculated. A feature of declining balance depreciation is that the book value of the asset never reaches zero. If the asset is going to be fully depreciated, at some point, a lump sum final depreciation must be taken.

The “defined period” referred to in the quote you posted is the period defined for the worksheet, not the first day of the life of the asset. Your example would have required 12 worksheets. For each one, the first day of the defined period would be one month later than on the previous worksheet.

Ok, Failed to read that…

Any Idea when straight-line capability will be added?

That is up to the developer.

So @Tut, considering the example that i have purchase a “Desk” (FA) for USD100.00 in January 2019 and the same “Desk” for USD100.00 in December 2019.

When i run the depreciation calculation sheet report for 2019 (1st Jan to 31st Dec), Manager is taking the total book value of the FA, in this case USD200.00 (regardless if one of them was just purchased) and it depreciates the total value (both desks) by 365 days. Is this a bug or it is the system capability at the moment?

if it is the system capability, i would have to run a monthly depreciation calculation sheet report OR manually calculate and do a depreciation entry per FA at the end of year?

Thanks.

First, the two desks are not the same fixed asset. They are separate and should have been entered as such. Your post makes it sound like you might have combined their acquisition as a single fixed asset.

Second, neither had a book value at the beginning of 2019, because neither existed on your books. So you should not have created a Depreciation Calculation Worksheet for January 1, 2019 through December 31, 2019. You should have started the first worksheet on the day you purchased the first desk and ended it the day before you purchased the second desk. The second worksheet should have started on the day you purchased the second desk and run through the end of the year.

Third, further breaking your worksheets up into monthly periods is acceptable if you want to keep your records up to date on a monthly basis. But they must be created in chronological order and adhere to the beginning/ending date instructions above.

Fourth, the program does not currently have the ability to determine depreciation start dates based on purchase transactions. You need to take those into account when creating worksheets. That makes the worksheet most useful for depreciating assets after the period in which they are acquired.

Personally, I find the Depreciation Calculation Worksheet to be of limited use in its current form. The acquisition date issue is one reason. Usability only for declining balance calculations is another. Difficulty accommodating legal jurisdictional requirements (such as accounting period mid-point dictates) is a third. But it is a starting point, and improvements have been promised. What I really like is the ability to make the depreciation entries with a single button click and edit them before the depreciation transaction is actually created. This gives you the ability to create a worksheet with all “continuing” assets and add lines manually for assets purchased during the report period. That might be easier than creating multiple worksheets when purchase dates are staggered.