What is asset depreciation?
Academies and maintained schools are required to report on their annual finances, including a set of up-to-date accounts and a fixed asset register. Asset depreciation is a fundamental accounting concept and part of the “matching principle,” which means that the expenditure part of your accounts must reflect the useful economic life of school tangible assets. For example – you might buy a laptop this year but you would expect to benefit from the purchase for the next five years. As such, you would spread the expenditure on this asset over a 5 year period in the balance sheet.
As well as being an established accounting practice, asset depreciation will also help you negotiate the right insurance policy for your school and plan your budget by forecasting future investments.
There are a number of depreciation methods, including Sum-of-the-Years' Digits Depreciation and Units of Production Depreciation. However, the two methods most commonly used by UK schools are straight line depreciation and declining balance depreciation.
Straight line depreciation
This is seen as the simpler of the two most popular depreciation methods. This is when you take the cost of an asset and divide it by the number of years you think it will be useful to your school - sometimes referred to as its ‘useful life’. This will tell you the annual depreciation of the asset. If you need to, you can go further and divide this by 12 to get the monthly depreciation.
So for instance, if you bought a computer for £1,000 and used it for 5 years, you would divide £1,000 by 5 to get an annual depreciation of £200. You could then divide £200 by 12 to get a monthly depreciation of £16.67.
This is quite a straightforward calculation, and the result is recorded as a cost in your accounts.
Declining balance depreciation
Declining balance depreciation - sometimes referred to as ‘reducing balance’ - is a method used for assets that tend to depreciate more quickly near the beginning of their useful life. If an asset has a higher depreciation in the early part of its use, and a lower depreciation later on in its life, this is known as declining balance depreciation.
To calculate an asset’s depreciation in this method, you would apply a fixed percentage of depreciation on the value of the asset each year. You multiply the value of the asset by the percentage of depreciation.
For example, let’s say your school bought a minibus for £2,000 with a projected useful life of 4 years, and you want to depreciate it by 20% a year. You would simply multiply £2,000 by 20%, which gives you a value of £400. For the second year, you would start the calculation with the original cost (£2,000) minus the depreciation cost (£400) - so in this instance it would be £1,600 multiplied by 20%, which gives a depreciation value of £320 for the second year. You would continue in the same pattern.
This table shows what would happen to the value of the minibus in this example over 4 years:
|
Year |
Asset value |
Reducing balance |
Depreciation |
Accumulated depreciation |
|
1 |
£2,000 |
20% |
£400 |
£400 |
|
2 |
£1,600 |
20% |
£320 |
£720 |
|
3 |
£1,280 |
20% |
£256 |
£976 |
|
4 |
£1,024 |
20% |
£204.80 |
£1,180.80 |
Keeping track of asset depreciation
A good School Asset Management platform will include an asset depreciation module, including an option for straight line or declining balance depreciation. This feature allows schools to set up their own depreciation rules for specific asset types. For example, it’s generally recommended IT equipment is depreciated over a 3 to 5 year period. The software will then automatically adjust the asset’s value over the course of its useful life so you have an accurate asset register.
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Tags: Asset Management