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Depreciation

lgarsidelgarside Well-KnownRegistered Posts: 122
Hello I was hoping someonewould be able to clarify something for me.

If a fixed asset was bought for 20,000 and paid over 5 years is it possible to depreciate it over 8 years or does the amount of depreciation years have to be equal to or less than the time period to pay it off? What would the accounting entries be?

Comments

  • AK002AK002 Font Of All Knowledge Registered Posts: 2,492
    Depreciation should be over the life of the asset, so even if you are paying it for 5 years i presume the asset will last for longer than 5 years? i.e. the 8 years you suggested?

    Accounting entry for dep'n is Dr depreciation charge in the P&L and Cr Depreciation charge in the BS (also known as accumulated depreciation)

    Hope this helps.
  • Steve CollingsSteve Collings Experienced Mentor Registered Posts: 997
    Is the asset under a 'finance lease' or a 'hire purchase contract'.

    If the asset is held under a finance lease then it must be depreciated over the SHORTER of the lease term or its useful life - so in this instance it would be five years.

    If it is held under a HP contract that is like a finance lease then it should be depreciated over its useful life - i.e. eight years.

    Regards

    Steve
  • blobbyhblobbyh Font Of All Knowledge Registered Posts: 2,415
    Payment period isn't generally related to an assets accounting treatment. You may buy buy a computer on twelve months interest free credit but you'd depreciate it over the usual three years on the B/S. Equally a twenty year machine that you pay for over five.

    And let's not forget the good old favourite, the annual council tax bills which are prepaid over twelve months but physically paid for over ten installments.

    EDIT; Oops, just read Steve's post!

    http://www.iasb.org/NR/rdonlyres/B8ABE9AA-8F5B-4301-866E-ED2D423504E7/0/IAS17.pdf
  • ajamesajames Settling In Nicely Registered Posts: 17
    Is the asset under a 'finance lease' or a 'hire purchase contract'.

    If the asset is held under a finance lease then it must be depreciated over the SHORTER of the lease term or its useful life - so in this instance it would be five years.

    If it is held under a HP contract that is like a finance lease then it should be depreciated over its useful life - i.e. eight years.

    Regards

    Steve

    Wouldn't the business need to be incorporated for IAS17 to apply? The OP doesn't mention if it is.
  • Paul24Paul24 Experienced Mentor Registered Posts: 578
    blobbyh wrote: »
    Payment period isn't generally related to an assets accounting treatment. You may buy buy a computer on twelve months interest free credit but you'd depreciate it over the usual three years on the B/S. Equally a twenty year machine that you pay for over five.

    And let's not forget the good old favourite, the annual council tax bills which are prepaid over twelve months but physically paid for over ten installments.

    EDIT; Oops, just read Steve's post!

    http://www.iasb.org/NR/rdonlyres/B8ABE9AA-8F5B-4301-866E-ED2D423504E7/0/IAS17.pdf

    Tut tut..... nearly made yourself look silly there Rob :001_smile:
  • blobbyhblobbyh Font Of All Knowledge Registered Posts: 2,415
    Me silly? With a name like blobbyh? Never. Cheers for quoting it though mate! The thing about prepayments though is how many people seem to think they're directly related to physical payments made from the bank rather than the monthly adjustments and not knowing why it's necessary to reverse them on the first day of each new period.
  • Steve CollingsSteve Collings Experienced Mentor Registered Posts: 997
    ajames wrote: »
    Wouldn't the business need to be incorporated for IAS17 to apply? The OP doesn't mention if it is.

    To be honest I think the OP might be dealing with a UK based company in real life. I doubt therefore that IAS 17 would be applicable unless the company was a PLC or Aim-listed company in the UK who has to report under IFRS. Whilst i can see why IAS 17 has been referred to, I would tend to think IAS 16 'Property Plant and Equipment' would have took precedence (FRS 15/FRSSE equivalent).

    Incorporated or otherwise, an entity still needs to apply GAAP to their financial statements which is either IFRS or UK GAAP (FRS/fRSSE/ etc).

    Regards

    Steve
  • ajamesajames Settling In Nicely Registered Posts: 17
    To be honest I think the OP might be dealing with a UK based company in real life. I doubt therefore that IAS 17 would be applicable unless the company was a PLC or Aim-listed company in the UK who has to report under IFRS. Whilst i can see why IAS 17 has been referred to, I would tend to think IAS 16 'Property Plant and Equipment' would have took precedence (FRS 15/FRSSE equivalent).

    Incorporated or otherwise, an entity still needs to apply GAAP to their financial statements which is either IFRS or UK GAAP (FRS/fRSSE/ etc).

    Regards

    Steve

    ta Steve
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