What is Fixed Asset Depreciation and How Is It Calculated?

In the field of accounting and asset management, managing and tracking the value of fixed assets is an integral part of business operations. Depreciating fixed assets plays a crucial role in accurately reflecting the real value of assets over time and meeting financial and tax requirements.

In this article, EnterSoft will introduce the method of fixed asset depreciation, from the basic definition, of why we need to depreciate, to various common depreciation methods. The article will also answer important questions about the depreciation period of fixed assets. Let's delve deeper into this important method and the significance of depreciating fixed assets in the business process.

1. 1. What Is Fixed Asset Depreciation?

Fixed asset depreciation is an accounting and management process within a business, involving the allocation of the initial value of fixed assets over a specific period. The primary objective of depreciation is to accurately reflect the devaluation of assets over time, thereby contributing to asset management, tax calculation, precise financial reporting, and legal compliance. Fixed asset depreciation provides businesses with a clear understanding of the actual value of assets and supports decisions regarding the maintenance, repair, or replacement of fixed assets.

2. 2. Why Depreciate Fixed Assets?

Depreciating fixed assets should be a matter of concern because it plays a crucial role in asset management and a company's accounting. Below are some important reasons why fixed asset depreciation is necessary:

• - Reflecting the utility value of assets: Fixed assets have a finite lifespan and will depreciate over time due to wear and tear or technological obsolescence. Depreciating fixed assets helps a company represent the true value of assets in financial reports, preventing overvaluation of assets.

• - Reducing income tax: Fixed asset depreciation is an accounting expense that doesn't involve cash outflows but is deducted from pre-tax profits to reduce income tax. Depreciating fixed assets helps companies save cash and potentially reinvest it in their business operations.

• - Forecasting financial resources: Knowing the depreciation costs for specific assets helps businesses forecast and manage their finances effectively. This aids in financial planning and ensures there is sufficient funding to replace, upgrade, or purchase new assets when needed.

3. 3. Major Depreciation Methods

There are several different depreciation methods, but the three main types of depreciation are:

3.1. Straight-Line Depreciation

This method is the simplest and most common. It evenly allocates a portion of the initial value of the asset over each period.

For example, if an asset has a value of 10 million Vietnamese dong and a useful life of 5 years, it will depreciate 2 million dong each year (10 million dong / 5 years).

3.2. Declining Balance Depreciation

This method focuses on higher depreciation at the beginning of the asset's useful life and decreases over time. Depreciation is calculated based on the remaining value of the asset.

For example, if an asset has a value of 10 million Vietnamese dong and a depreciation rate of 20% per year, in the first year, it will depreciate 20% x 10 million dong = 2 million dong. In the following year, the asset's value is 8 million dong, and the depreciation will be 20% x 8 million dong = 1.6 million dong.

3.3. Depreciation Based on Quantity or Production Volume

This method depreciates fixed assets based on the quantity or volume of products the asset produces in a year.

For example, a production machine is depreciated based on the number of products it is expected to produce. If the machine is expected to produce 10,000 products and has a value of 100 million dong, each product will be depreciated at 10,000 dong.

Each depreciation method has its advantages and limitations, and the choice depends on the specific type of asset and the accounting objectives of the business. Applying the right depreciation method helps businesses gain an accurate view of the value of fixed assets and manage them efficiently.

4. 4. How Many Years Are Fixed Assets Depreciated For?

The depreciation period for fixed assets is determined based on Circular No. 45/2013/TT-BTC issued by the Ministry of Finance and depends on the specific type of assets:

• - New Fixed Assets: The depreciation period for new fixed assets must comply with the regulations of Appendix I in Circular 45/2013/TT-BTC. This appendix specifies the depreciation period for assets based on the type of asset and the industry of the business. Businesses must apply the corresponding depreciation period for that type of asset.

• - Intangible Assets: For intangible assets, businesses have the discretion to decide the depreciation period. The depreciation period will depend on the specific characteristics of these intangible assets, and businesses must have a reasonable basis for determining the depreciation period to accurately reflect the actual value of the asset.

For intangible assets like land use rights, the depreciation period depends on the term of asset use. For example, land use rights will have a depreciation period corresponding to the lease term.

For intellectual property rights, rights to plant varieties, and industrial property rights: The depreciation period is based on the protection period of the asset, which is usually expressed in written documentation.

In summary, calculating the depreciation expense of fixed assets requires compliance with legal regulations and the specific determination of the asset along with the corresponding depreciation period.

Conclusion

In conclusion, fixed asset depreciation is an important concept in the accounting and financial management of a company. Depreciating fixed assets helps reflect their utility value, reduces income tax, and allows for reinvestment in business operations. There are various depreciation methods, each with its advantages and disadvantages. The useful life of fixed assets depends on the asset type and state regulations as well as company policies.

To learn more about EnterSoft's products and services or to ask questions and seek advice, please contact us.

EnterSoft Software Solutions Joint Stock Company

Email: info@entersoft.com.vn - kinhdoanh@entersoft.com.vn

Phone: 0985.200.060

Website: www.entersoft.com.vn