How do I handle depreciation and amortization?

SystemSystem Posts: 253 admin

imageHow do I handle depreciation and amortization?

We're all familiar with the idea that when we buy a car, or a television, or any other large item, it depreciates — it becomes worth a bit less every year. When you buy larger assets for your busin...

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edited January 1, 2019 in Help Center Discussion
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  • headshotsbykempheadshotsbykemp Member Posts: 2

    Quick question, why do we create a bill payment?

  • THaydenTHayden Member Posts: 1

    Confusing, why are you using a van example for the illustrations, while talking about a printer?

    edited January 5, 2019
  • SamdSamd Administrator Posts: 560 admin

    @headshotsbykemp good question! This is to essentially enter the historical data for the purchase of the inventory that may depreciate, and one of the easier ways to assign a value to the item. @THayden that is a good catch as well, and thanks for pointing that out. I'm going to look into getting this edited so examples align

  • headshotsbykempheadshotsbykemp Member Posts: 2
    Thank you, Sam! I ask because I now show outstanding bills for the value of the items being depreciated.
  • lorirameyloriramey Member Posts: 1

    I noticed the Vendor Prepayment option in the Chart of Accounts in Wave, and it seems to be a better fit for something like a 3 yr hosting plan for my website, which I paid in full upfront to get a discount. Would I follow this same procedure but use the Vendor Prepayment account in place of the Other Long Term Asset....but otherwise follow the same process?

  • shotbyarunshotbyarun Member Posts: 1

    I've the same question as loriramey! Whats your recommendation to track the pre-payments for website and recurring monthly subscription fee for Software?

  • JacobJacob Member Posts: 4

    @Samd The tutorial shows going through and adding the item through "Bills". Would adding the transaction through "Receipts" be the same outcome? That's how I've done mine so far but I'm not sure if it shows up the same way.

  • JamieDJamieD Administrator Posts: 1,091 admin

    @loriramey @shotbyarun The workflow that you've provided in terms of selecting the Vendor Prepayment option in the Chart of Accounts section should suffice for what you are trying to accomplish in Wave. With that said, you would follow the same procedure that's outlined in the help centre article.

    @Jacob The Receipts app is generally used for expenses such as meals, travel costs, small office supplies etc -- where as the Bills section is used for larger items such as operating expenses, monthly costs (rent, internet, cellphone etc). Either way, the process should be the same for the transaction that's created from Receipts as it would be in the Bills section.

  • VFearVFear Member Posts: 8

    @SAMD, how does the bill get reduced using this method? I have a bill outstanding for the value of the asset and even though I have applied a journal entry as per the instructions, the bill and the asset account haven't been altered, i would expect one of the accounts to reflect the new value of the asset.

  • JamieDJamieD Administrator Posts: 1,091 admin

    @VFear In terms of the bill (since it's already been created in Wave and is outstanding) the total amount in that particular section would not be adjusted. However, if you created the expense transaction in Wave (or Journal Transaction) it should have had an adjusted balance. If possible, could you please confirm with screenshots exactly what you are seeing when you creating these transactions?

  • VFearVFear Member Posts: 8

    @JamieD

    This is the bill:
    This is the journal entry:
    The depreciation account set up:
    The account balances:

    I would like to see the Car asset account reduce by the amount of the depreciation.

  • SamdSamd Administrator Posts: 560 admin

    Hey @VFear - at the moment the Car Asset would actually remain as a fixed asset, but your overall asset values you should be reduced by the depreciation expense in net, rather than the actual asset account itself. The actual asset account remains static however to reflect the initial purchase price/value.

  • VFearVFear Member Posts: 8

    @Samd - I'm not sure I entirely understand your answer. I understand the bit about leaving the car as a fixed asset, but don't know how I will then depreciate it next year, without having to calculate the depreciation including all previous years.
    The bit I don't understand is: "but your overall asset values you should be reduced by the depreciation expense in net, rather than the actual asset account itself."
    Have I followed the directions correctly (from what you can see)?

  • JamieDJamieD Administrator Posts: 1,091 admin

    @VFear Based on the screenshots that you've provided us here -- it appears that you're doing things correctly based on what displays in the help centre article. The depreciation account you've added in Wave is what we call a 'contra-asset account.' The value of this account will appear as negative next to the rest of the asset accounts on the balance sheet (as it's doing now). Each time you depreciate the asset, you will reduce the contra asset account's balance (Depreciation Car) -- this will net out from the rest of your assets' value.

  • VFearVFear Member Posts: 8

    Thank-you. @JamieD . If I want to track the asset value and reduce the deduction by the percentage of private mileage how would I do this? I did ask the question somewhere but it hasn't been answered

  • BernieBBernieB Member Posts: 4

    So, I've read through this chain, but do not see an answer for how the bill we are instructed to create for the Other Long Term Asset gets addressed. The bill shows as outstanding on my Dashboard and in Accounts Payable on my Balance Sheet. The asset/bill was paid for when I purchased the item. So how do I address the "outstanding" bill?

  • SamdSamd Administrator Posts: 560 admin

    Hey @BernieB - you'd want to mark this bill as paid and put in the payment date as when the asset was acquired. This will record the initial value for the asset, which equals what you paid. Going forward, this initial value will remain fixed, but it will be offset by the depreciation.

  • BernieBBernieB Member Posts: 4

    @Samd,
    Got it! Thanks!

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 173 ✭✭✭

    I'm really puzzled as to why you would create an artificial bill for this. Common sense to me says that Depreciation is a straightforward journal entry, debiting Depreciation in the Profit/Loss account (under expenses) and crediting a Depreciation account set up under the relevant asset group, then repeating this each year as a compute the charge you intend to make. Isn't the creation of a bill just causing additional and unnecessary complications?

  • Ryan_WRyan_W Administrator Posts: 461 admin

    @MerlinAccounts_UK I get that, from your experience, creating a journal entry for this is more intuitive; that said, I'd check out Sam's explanation at the top of this thread. Basically, the bill is a straightforward entry path to entering this value, although I get that it feels like an extra step for you. That said, I wonder if someone from our Accounting Product team can chime in here to give a more "under the hood" explanation/justification here.

  • BarkersBarkers Member Posts: 1

    Figured it out :-)

    edited March 22, 2019
  • TsemTsem Member Posts: 1

    Hi, when I've uploaded a receipt of an asset that I've purchased, I see that under Transactions, I can categorise that purchase under the Long Term Asset Account that I've created for it. So does this mean I still have to create a bill?

  • jondecker76jondecker76 Member Posts: 3

    I'm with others, adding a bill seems to be a weird over-complication... But regardless, I do have another question.
    The article mentions creating a Long-term asset account for the asset. But then it says to also create a depreciation & Amortization account, but doesn't specify whether one single depreciation account needs created, which is good for all assets... Or if each and every asset should have it's own depreciation account.

    Also, when should the journal entry be created? The beginning of the year? The middle of the year? On the anniversary of the purchase? Monthly?

    edited April 7, 2019
  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 173 ✭✭✭

    @jondecker76

    Amortisation is what you do with a long term asset eg Freehold Property, Long Leasehold Property, Goodwill. Depreciation is for shorter life assets that you are likely to have to replace during the working life of the business. On this basis you cannot have a single Depreciation account on the Balance Sheet - indeed you should actually have a depreciation account for each asset group (Vehicles, Plant, Fixtures & Fittings), and these should NOT go under Long-Term Assets as by their very nature they aren't long term.

    In the Profit & Loss Account it is fine to have a single Depreciation account for all your Depreciation charges, but you should still keep Amortisation in a separate account on the Profit & Loss.

    Depreciation is traditionally computed and accounted for annually, but if you are preparing Management Accounts for shorter periods (half yearly/quarterly/monthly) you should compute to match the reporting period.

    When you calculate the charges you count the days from purchase up to the end of the selected reported accounting period, except for pre-existing assets bought in prior periods when you would work it out for the length of the accounting period concerned.

    Hope that clarifies a little. I certainly would NOT recommend creating dummy invoices however!

  • HOSPMHOSPM Member Posts: 14

    @Samd @Ryan_W

    Assuming a business that operates according to a calendar year purchases a computer in Dec 2018 (recorded under "Transactions"), reflects the purchase and its depreciation on its 2018 P&L and balance sheet, but returns the asset and receives a refund for it in January 2019, how would you:

    1) Record the refund of the asset's purchase price?
    2) Record its depreciation (as a credit perhaps) in 2019?

    edited April 23, 2019
  • JamieDJamieD Administrator Posts: 1,091 admin

    @HOSPM. In this situation all you need to do is categorize the refund as 'refund for income' and choose the specific asset account and from there, you will need to reverse the journal transaction that was performed to record the depreciation so that it zeroes the balance out. Hope that helps!

  • MdjMdj Member Posts: 1

    I'm wondering why not use the "Property, Plant, Equipment" asset category? [One reason is an account in this category doesn't show up in the list when choosing the "Expense Category" step - why not? Isn't a printer a piece of equipment?]

  • SamdSamd Administrator Posts: 560 admin

    Hey @Mdj - that's a good question. For the most part, this is because we did not have the Property, Plant, Equipment sub-type in our classic platform, so we handled this through other long term assets. Thank you for calling out though that Property, etc asset types aren't selectable as an expense account in a bill. Right now it would require using the Accounting > Transactions page instead, so theoretically you could still do this by creating an expense transaction, rather than a bill, for tracking depreciation and amortization.

  • ErnestChuaErnestChua Member Posts: 2
    Hey admins, why is that after I created the journal transaction for the depreciation expense, it's not appearing in my Profit & Loss statement?

    Debit: Depreciation Expense
    Credit: Depreciation - Other Long Term Assets
  • AlexLAlexL Administrator Posts: 544 admin

    Hey @ErnestChua . Can you ensure that the date that you used on your Journal Transaction is the correct date, and that the period that you're looking at in your Profit & Loss is correct as well? It should be appearing in your P&L.

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