Depreciation Worksheet and Leap Years

The Depreciation Worksheet calculates the depreciation value using the Reducing Balance method but if your year end includes an extra day because of a Leap Year, the fact that there are now 366 days and not 365 means that the depreciation is more than I expected

For example, I use 10% reducing balance to calculate the depreciation for my year ending 29 Feb 2020 and for the dealing machine instead of the expected 863.50 x 10% = 86.35 the worksheet calculates 863.50 x 10% x 366/365 = 86.59

Yes, depreciation is calculated based on number of days, as clearly shown by the worksheet headings. This is what allows you to arbitrarily designate accounting periods or dispose of assets part way through a period. From a rigorous standpoint, an asset depreciates more in 366 days than in 365.

If, for some reason, you want to artificially limit depreciation during leap years to 365 days, you can edit the automatic calculations before creating the depreciation entries. From the Guide:

I only noticed this because I downloaded the latest update and saw it was 19.11.58

I was hoping it might have an option to use Original Purchase Cost instead of Reducing Balance

If I was going to use it I would just use range 1/3/2019 to 28/02/2020

That would certainly change the calculation, but the depreciation entry would then be dated for the next-to-last day of February. Why would you not want to claim the full, allowable depreciation deduction?

Different accounting packages handle this differently. Oracle E-business requires you to redefine periods in your calendar for a leap year so one “daily” period includes two days. SAP seems to ignore the extra day. Some microsoft products allow selection of daily or periodic depreciation methods. And, of course, local regulations may dictate how depreciation must be calculated, sometimes with artificial determination of percentage amounts based on when an asset is placed into service.

No doubt, more options could be provided in Manager. Hopefully, they will be. In my opinion, the good news is that the first capability introduced covers many of the more complex calculations, such as daily depreciation over a full range of declining balance rates. Straight-line depreciation, in contrast, is usually much simpler.

We use straight line depreciation using years not days - we only have 20 assets so it’s not a big issue

So, as stated in the Caution at the beginning of the Guide, you should not use the worksheet.

Then how do you handle purchases and disposals if they occur throughout the year.
Depreciation at best is an estimate based on the formula factors, it is not a precise actual, therefore is it material if the reported depreciation is either 86.35 or 86.59.

Out of habit, I always round the asset purchase and the depreciation to the nearest whole amount so that the BS > Asset and Prov for Depn accounts are always neat round amounts.

I think this statement misleads other forum members. Yes, depreciation expense is a calculation based on a formula, as opposed to a documentable actual expense. But that formula’s inputs should be actual values, not estimates or approximations. The formula is often dictated quite specifically by law, so the values used would definitely be material.

Are you suggesting it is acceptable accounting to round entries for the sake of convenience? (I’m not speaking of rounding in financial reports, but of primary entries.) How would you reconcile such actions with bank records or support them in an audit?

Depreciation, stock valuation, … are fundamental to accounting but are always and everywhere a matter of opinion
You can have the fancy formulas you want with as many inputs as you need, but it will still be an opinion

The use of standards, Reducing Balance, Steaight line, average cost, FIFO, etc will help to standardise accounts and make it easier to compare one period/one business versus another

Apart from the fact that it will also protect you from accusations of false accounting

In my experience the depreciation rate is always quoted as “per annum” (i.e. per year). So, if the depreciation for an asset is , say, $1,000 then if the accounting year is a leap year the daily amount is 1,000/366. Otherwise in a non leap year it would be 1,000/365.

I understand that the depreciation worksheet needs to first bring the rate to a daily rate so that it can correctly calculate amounts for assets disposed during the year, however, it is my opinion that it is calculating the daily depreciation rate incorrectly, so I would like to propose that this is a bug.

Currently, the worksheet calculates the daily rate by dividing the annual rate by 365.

To be correct, it should calculate the daily rate by dividing the annual rate by the number of days in the depreciation year.

This way the worksheet will work for other depreciation methods (such as straight line) when they are introduced.

While frequently quoted on an annual basis for convenience, there are many depreciation methods that do not use annual calculations. When quoted on an annual basis, but used in a daily calculation, the rate is typically divided by 365 for the notional daily rate. This is what Manager does. (Some programs ignore leap years entirely.) See this example for 2016, a leap year. Depreciation of the second asset, for example, is (2950 x 0.20) * (366 / 365) = 591.62:

If the same worksheet is used to calculate depreciation for 2017, you get different results:

Manager calculates rates as designed. There is no bug on this issue. If you do not wish to use the method for which it was designed, you should make your own depreciation calculations and enter them in the Depreciation Entries tab.

That would only be correct if the program’s design adopted different conventions. In fact, the program does not base its calculations on a year, because depreciation is often calculated for different periods. Manager bases its calculations on the number of days in the defined period after deriving a notional daily rate for a 365-day year. Other accounting packages adopt a very wide variety of approaches to this problem, most of them either ignoring it entirely or requiring you to laboriously define your own calendar periods.

The current worksheet is not intended or designed for straight-line depreciation. That would require basing the depreciation calculation on acquisition cost (possibly less salvage value, depending on local law or accounting standards) rather than book value. So adopting your suggestion would not make it suitable for straight-line depreciation or any method besides daily declining balance.

I agree with you @Tut, I was presumptuous in suggesting that it is a bug. Only the developer can tell us if the current configuration is a bug or by design.

So, I will change my tack. This forum is about suggesting better ways of doing things to improve the way the program operates. I am suggesting that it would be an improvement to the new depreciation feature if the calculations are changed to that described in my previous post. It will also be advantageous to future enhancements to this feature.

The problem with that, @generalegend, is that it would sacrifice the utility of definable depreciation periods, which are necessary in some jurisdictions. For example, some countries require mid-month or mid-quarter dates as inputs for calculating depreciation. And some businesses do not account on calendar weeks, months, or years.

I definitely agree the current worksheet has limitations. But it is not just a matter of redefining the number of days in a leap year. There are numerous factors that must be defined for the assets themselves before a really robust depreciation automation is possible. I look forward to those. Meanwhile, the current worksheet does certain things—correctly. And they are fully explained in the Guide:

I have already conceded that the worksheet may be operating correctly as to the way it may have been designed. What I am suggesting is that it may be possible for it to do it better.

I am sorry that you have so grossly misunderstood the post, so to clarify points for you.

Yes, and that was stated - “based on the formula factors” - note the “based”
That is, the formula factors are “based” upon the prescribed inputs for the jurisdiction.
Those factors are never illusory “estimates and approximations” as you mis-interrupted it.

So to re-write the statement to give you increased clarity:
Depreciation at best is an estimate based on the formula factors, prescribed by the jurisdiction.

Yes, and once again I will re-write the statement to give you increased clarity:
I always round the asset purchase and the depreciation to the nearest whole amount so that the BS > Asset and Prov for Depn accounts are always neat round amounts, with the rounding adjustment being posted to a P&L account.

For example, if a purchased asset is 2045.36, then 2045 goes to the asset and 0.36 goes to the P&L. So the primary entry always remain reconcilable with both the source transaction and the auditors.

For the depreciation rounding I refer you to your own advice in post #2 - “you can edit the automatic calculations before creating the depreciation entries”.

These rounding’s and the depreciation differential between 365 v’s 366 days are not material.
Using your own examples of 2016 - 5635.48 and 2017 - 5620.08, this 15.40 variation is immaterial to both the financial year and the fixed asset values, as it balances out over time with disposal / write off etc.

Depreciation is an estimate based upon “arbitrary” formula factors as set by a jurisdiction. For example, a vehicle in Country A might have a depreciation rate of 15% yet that same vehicle in Country B may have a depreciation rate of 20%. Therefore 365 or 366 days is just a arbitrary factor.

Thank you for your clarification.