What is depreciation?

Depreciation is a term used in accounting to describe the cost of using an asset over a period of time (when it’s useful to your business).

How do you calculate depreciation in the UK?

There are two different ways you can calculate depreciation in the UK:

1) Straight line depreciation

Straight line depreciation is usually seen as an easier method for calculating depreciation. It’s worked out by taking the original cost of the asset, and dividing it by the number of years that you deem the asset will be useful to your business. This is a simple calculation with the result being posted as a cost each year on your profit and loss account.

For example: if a company purchases a printer that costed £1,000 at the beginning of their 2016 financial year, and the company believes this printer will be expected to last 4 years, you simply divide £1,000 by 4 to give you a depreciation of £250 a year.

2) Reducing balance depreciation

Reducing balance depreciation is a method used when the depreciation of an asset is higher in the earlier years of its life, and when that depreciation amount begins to reduce as the life of the asset progresses.

For example: if a company purchases a computer worth £1,000 (with a projected lifetime of 4 years), and you want to depreciate it at a 20% reducing balance you would simply multiply £1,000 by 20% which gives you a value of £200. For the next year, you would start the depreciation calculation from the original cost minus the depreciation cost.

The table below will show what will happen to the assets value after 4 years:

Year Asset Value Reducing Balance Depreciation Accumulated Depreciation
1 £1,000 20% £200 £200
2 £800 20% £160 £360
3 £640 20% £128 £488
4 £512 20% £102.40 £590.40

Using Clear Books to record depreciation

With the Clear Books software, you can set your fixed assets and record depreciation. If you aren’t currently a Clear Books user, sign up for a 30 day free trial today.

Step 1: To get started, log into your Clear Books area and turn on the Fixed Assets feature in Toggle features. Settings > Toggle Features

Step 2: When creating a bill or explaining a bank statement that involves the purchase of a fixed asset, you will need to choose one of the Non-Current Asset Codes. You have a range of options to choose from, such as:

  • Fixtures & fittings
  • Plant & equipment
  • Land & property
  • Motor vehicles
  • Intangible assets

Step 3: Once you have saved the bill, your fixed asset will be added to the pending list: Tools > Fixed Assets > Pending

Once here, you can enter the asset name, reference number and so on. It will also allow you to enter the depreciation details such as the depreciation method, rate, economic life and account. Simply approve the details to complete the fixed asset entry.

Posted by Tom Smith

Thomas joined the team in April 2014 as a Digital Marketing apprentice. He likes Clear Books because the company is young, dynamic and has a great atmosphere. On weekends he can be found watching films or down the pub with mates.

Leave a reply

Your email address will not be published. Required fields are marked *