Depreciation best practices

JohnBoyRummyJohnBoyRummy Member Posts: 2

Bookkeeping newb here and I have a few questions about depreciation.

  1. Is it best practice to create a separate asset account (and corresponding accumulated depreciation account) for each asset? Or do you somehow lump them into one account?
  2. How do I decide if something should be accounted for as an asset or an expense? Is there a minimum dollar value that need to be considered? Or is it merely useful life?

Thanks in advance.

Comments

  • KiahDKiahD Administrator Posts: 267 admin

    Hey @JohnBoyRummy,

    You can do either! It's possible to use only one Depreciation Expense and Accumulated Depreciation account for all of your capital assets. Alternatively, you can create a separate pair of these accounts for each asset account, under Accounting > Chart of Accounts, to track each asset separately. That said, I recommend doing so separately, as it's likely each asset will have a different depreciation rate.

    To determine whether a purchase is a Capital asset, or a normal expense, I recommend taking a look at this Help Centre article.

    If you have further questions on how to record depreciation correctly for an asset, I recommend reaching out to an accountant, as here on the Customer Support team, we're not trained CPAs I'm afraid!

  • MoshellMoshell Member Posts: 5

    Hi @JohnBoyRummy,
    The best practice depends on the complexity of your situation. You need to maintain an asset subledger (list of assets with associated info like acquisition date, capitalized value, depreciable life, accumulated depreciation, net book value, etc). By creating a separate account for each asset within Wave, you basically create the subledger within the chart of accounts. High end ERP systems have integrated assets modules, but that is generally overkill for small businesses.

    Two things to consider when creating your asset capitalization policy (yes, you need to document the policy). Useful life and materiality. Will your $200 office chair last more than a year? Probably yes. Will expensing it this year versus over 5 years materially impact your financial statements? Probably not. Will 20 chairs for your office at $200 each materially impact the books? Maybe. Also note, the IRS defines asset categories and their depreciable life. Set a dollar threshold that is material for your business ($500, $1000, $5000, whatever) and then try to use the IRS asset class/useful life to make it easier at tax time (unless the asset has significantly different life in reality).

    If you have hundreds of individual assets and have a lot of additions and disposals, creating a separate account pair for each could be tedious and clutter your chart of accounts and reports. It might be easier to maintain your subledger in a spreadsheet (excel, or Google Sheets), and then simply make monthly journal entries at month end supported by the spreadsheet calculations. However, you need to reconcile the two and maintain the asset roll forward (opening plus additions minus disposals equals closing). If you would like at least some visibility simply looking at the balance sheet, you could split the assets into classes (IT , vehicles, machinery, intellectual property, etc.) and create ledger accounts for each class, maintaining the full subledger in the spreadsheet. High value or critical assets could still be assigned their own account, as it is important you keep an eye on their value. I had one plant accountant that kept a photograph on the wall of any asset that cost +$1 million just so he knew what it was.

    If you only have a handful of assets or don't have many additions and disposals, I would definitely agree to create separate accounts for each one within Wave and not bother with a separate spreadsheet. The higher the threshold you set for capitalizing assets, the easier your asset subledger will be to maintain but the more one-off small asset purchases will impact your P&L. Remember though, local property taxes are not limited to just your book assets. You might want to keep track of certain assets even if fully expensed upon purchase (like small IT equipment or furniture) in order to manage your tax assessment.

    Regards,
    Lindsey

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