{"id":26268,"date":"2016-04-05T10:21:39","date_gmt":"2016-04-05T09:21:39","guid":{"rendered":"https:\/\/www.clearbooks.co.uk\/?p=26268"},"modified":"2018-08-24T09:18:33","modified_gmt":"2018-08-24T08:18:33","slug":"what-is-depreciation-and-how-do-you-calculate-it-in-the-uk","status":"publish","type":"post","link":"https:\/\/www.clearbooks.co.uk\/blog\/what-is-depreciation-and-how-do-you-calculate-it-in-the-uk\/","title":{"rendered":"What is depreciation and how do you calculate it in the UK?"},"content":{"rendered":"

What is depreciation?<\/h2>\n

Depreciation is a term used in accounting to describe the cost of using an asset over a period of time (when it\u2019s useful to your business).<\/p>\n

How do you calculate depreciation in the UK?<\/h2>\n

There are two different ways you can calculate depreciation in the UK:<\/p>\n

1)\u00a0Straight line depreciation<\/h3>\n

Straight line depreciation is usually seen as an easier method for calculating depreciation. It\u2019s 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.<\/p>\n

For example:<\/strong> if a company purchases a printer that costed \u00a31,000 at the beginning of their 2016 financial year, and the company believes this printer will be expected to last 4 years, you simply divide \u00a31,000 by 4 to give you a depreciation of \u00a3250 a year.<\/p>\n

2) Reducing balance depreciation<\/h3>\n

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.<\/p>\n

For example:<\/strong> if a company purchases a computer worth \u00a31,000 (with a projected lifetime of 4 years), and you want to depreciate it at a 20% reducing balance you would simply multiply \u00a31,000 by 20% which gives you a\u00a0value of \u00a3200. For the next year, you would start the depreciation calculation from the original cost minus the depreciation cost.<\/p>\n

The table below will show what will happen to the assets value after 4 years:<\/strong><\/p>\n\n\n\n\n\n\n\n
Year<\/strong><\/td>\nAsset Value<\/strong><\/td>\nReducing Balance<\/strong><\/td>\nDepreciation<\/strong><\/td>\nAccumulated Depreciation<\/strong><\/td>\n<\/tr>\n
1<\/td>\n\u00a31,000<\/td>\n20%<\/td>\n\u00a3200<\/td>\n\u00a3200<\/td>\n<\/tr>\n
2<\/td>\n\u00a3800<\/td>\n20%<\/td>\n\u00a3160<\/td>\n\u00a3360<\/td>\n<\/tr>\n
3<\/td>\n\u00a3640<\/td>\n20%<\/td>\n\u00a3128<\/td>\n\u00a3488<\/td>\n<\/tr>\n
4<\/td>\n\u00a3512<\/td>\n20%<\/td>\n\u00a3102.40<\/td>\n\u00a3590.40<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Using Clear Books to record depreciation<\/h2>\n

With the Clear Books software, you can set your fixed assets and record depreciation. If you aren\u2019t currently a Clear Books user, sign up for a 30 day free trial today.<\/a><\/p>\n

Step 1:<\/strong> To get started, log into your Clear Books area and turn on the Fixed Assets<\/strong> feature in Toggle features. Settings > Toggle Features<\/span><\/p>\n

Step 2:<\/strong> 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<\/strong>. You have a range of options to choose from, such as:<\/p>\n