FINANCE COACH 3 MONTH ACCOUNTING COURSE WEEK 8 ASSET REGISTER AND DEPRECIATION

FINANCE COACH 3 MONTH ACCOUNTING COURSE WEEK 8 ASSET REGISTER AND DEPRECIATION H E L P I N G Y O U S E T & A C H I E V E Y O U R F I N A N C I A L T A R G E T S U B T A C C O U N T I N G & F I N A N C E

Copyright & Disclaimer: The Finance Coach training programs are general advice that does not take into account your particular financial, personal or geographic position, and have been developed to teach you the basic principles of business accounting and business financial management. They are not a substitute for professional accounting or financial planning advice. Before taking actions that could have a negative effect on your financial situation, please discuss your plans with a suitably qualified and experienced advisor. The examples given in these courses are fictional (including the Real-life Examples ), and are given to help you apply the theory to actual business situations. Any similarity with a real business or person is purely coincidental. This workbook, as all Finance Coach material, is covered by an exclusive copyright, with the master rights being held by UBT Accountants ( UBTA ). No part of this material may be copied, distributed, loaned, rented, given away, etc. Any breach of this copyright will be viewed seriously, and will be pursued legally through the courts of law. Any suggestions should be sent to enquiries.financecoach@ubtaccountants.com H E L P I N G Y O U S E T & A C H I E V E

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Index INTRODUCTION 4 KEY LEARNING OUTCOMES 5 ASSET CONTROL 6 ASSET (CAPITAL PURCHASE) OR EXPENSE 7 DEPRECIATION: WHAT IS IT? 9 DEPRECIATION SCHEDULE (INCL ASSET REGISTER) 15 ASSET COST 17 ASSET IMPROVEMENT: EXPENSE OR CAPITAL? 17 CALCULATING DEPRECIATION 18 ACCOUNTING FOR DEPRECIATION 22 GAIN OR LOSS ON DISPOSAL 24 LOG BOOK USE 25 LOW VALUE POOL 28 GLOSSARY 30 POINTS TO REMEMBER FROM THIS WORKBOOK 32 Version 8.20 Y O U R F I N A N C I A L T A R G E T S

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION INTRODUCTION So what is depreciation? Why does this expense keep appearing in your Profit & Loss when you have not actually paid this money, and you purchased the asset years ago? When you purchase an asset, you exchange one asset (eg. money) for another asset (eg. a forklift); if you did not have sufficient funds to make the purchase (or you chose to do so because of your finance structure) you may take out a loan (i.e. a liability) to provide the funds to make the purchase. At this point the new asset appears on your Balance Sheet. 4 As this asset will last many years, it would make our Profit & Loss wrong if we applied all of that expense against our income in a single trading period; this would understate profits. So we take a portion of the expense each year, and apply this to the Profit & Loss. It is as if the asset has a limited life, so this will give us a realistic snapshot of profits in the trading period, with a suitable portion of the asset cost being included in the expenses. Read on to learn about the different types of depreciation, how it is calculated, the best way to approach it, and what happens when you sell the asset.

KEY LEARNING OUTCOMES At the completion of this week s study you will understand the following: 1. Why assets need to be controlled, maintained and protected. 2. The difference between items that can be expensed as soon as they are purchased, and items that need to be depreciated over a period of time. 3. What depreciation actually is. 4. What effect depreciation has on cash flow. 5. How the cost of an asset is ascertained for depreciation purposes. 6. How to calculate depreciation, and which method to use. 5 7. How depreciation is processed through the accounting systems. 8. How the profit or loss is calculated on a sale or disposal of an asset. 9. What a log book is used for. 10. What a Low Value Pool is, and when it is used.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Week 8 Section 1.69 ASSET CONTROL Assets are purchased so that the business can utilise them in the process of making money. The person that is responsible for each asset is often called the custodian. They are responsible to ensure that the asset is: Securely stored, and not subject to theft or vandalism Protected, so that it will not be adversely weathered or otherwise damaged Plus, where applicable: Correctly serviced as per manufacturer s specifications Kept clean, tidy and presentable Often a manufacturer will publish a service schedule or similar (see below). In the event of trading stock a physical inspection should be carried out by a suitably qualified / experienced person to ensure that the stock is in an acceptable condition. For the benefit of Internal Controls (i.e. fraud prevention) the person(s) checking the assets at the point of inspection should be different to the person responsible for it. This way the condition of the asset can be independently verified. 6

Week 8 Section 1.70 ASSET (CAPITAL PURCHASE) OR EXPENSE When a business incurs an expense that will be used towards producing a taxable income, this expense is used to reduce the profit from the sale of the goods or services that the business sells in view of arriving at the Net Profit. Because Net Profit is (usually) the number that a business is taxed on, legitimate expenses are used to reduce tax. A quick comparison between an expense item and a depreciating asset : EXPENSE ITEM: This is a cost actually incurred that will be used towards an income producing activity. If the benefit of having incurred the expense is utilised (ie used up or consumed) within the current financial period, accounting principles allows the business to deduct this cost from gross profit to calculate net profit. Examples: Advertising expense Offices wages Motor Vehicle fuel Electricity Etc. DEPRECIATING ASSET: When an item is purchased, and the benefit derived from the use of it will span a number of years, accounting principles tell us to divide the cost by the number of periods in which the benefit will be gained, and that portion is claimed (along with all the other expenses) each year. So if a digital camera had a lifespan of 5 years, rather than expense it ALL in the year of purchase, 20% could be claimed each year. Examples, with example expected life periods #: Motor Vehicle 8 years Brick/Stone/Concrete Building 40 years Computer 4 years Digital Camera 5 years Etc. # For actual expected life periods applying to your region and industry, discuss each new asset purchase with your accountant. 7

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION ASSET (CAPITAL ITEM) OR EXPENSE Cont: Key Learning Point: An EXPENSE is only claimed when it is INCURRED. The term incurred is referring to when the expense item is CONSUMED. An ASSET is consumed over multiple financial periods. 8 The interesting part is that this same ITEM could be either expensed or accounted for as an ASSET, depending on the length of time that it will take to consume it: EXAMPLE 1: PETROL 1. When you buy a tank of petrol, it is treated as if you will consume it in the current financial period, and is immediately expensed. 2. If you happened to purchase a TANKER of petrol (for example if you ran a fleet of trucks) this would be an asset, and as the petrol was consumed you would reduce the asset value by the amount consumed, and add this as an expense in the current period. 3. If you bought and sold petrol, this would also be an asset; inventory / trading stock! EXAMPLE 2: PHOTO COPY PAPER 1. If you purchase a box of copy paper you can treat it as if it will be consumed in the current financial period, and expensed immediately. 2. If you bought a large quantity of copy paper (for example a pallet), maybe to receive a better price, you could add this as an asset, and simply expense a portion each financial period (for example do a stock take every month and expense the used amount). 3. Once again, if you sold copy paper, it would be included as inventory.

Week 8 Section 1.71 DEPRECIATION: WHAT IS IT? With an item like petrol or photocopy paper we can simply measure the consumed portion so that we know how much to expense in any given period. However with other assets (such as machinery, equipment, vehicles, furniture etc) we don t consume it in the same way, but the value of the item is clearly reducing the older the asset becomes. 9 We should also note that this is the fairest way of applying expenses against revenue (refer to 3MAC Week 1 this is part of GAAP, and is a core principle to ensure that profits are reported accurately for each period); if we purchased some new equipment and applied 100% of the cost against the current financial period (even though the benefit of the asset was to be used across multiple years) that would make the current financial period look terrible, with such large costs. This is clearly not right, and correctly applying the expenses gives us a correct profit figure for the period. Also, assets that do not decline in value (such as land) are not depreciated. Website: marketing expense or capital purchase? If a website will continue to be used after the end of the current financial period, then the cost of developing it is capital in nature, and would be expensed (depreciated) over time. Small upgrades and maintenance would be more likely to be expensed in the year that the expense occurred. There are exceptions to this, so please discuss this with your accountant.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION DEPRECIATION EXAMPLE: On the Depreciation Schedule the Total Depreciation claimed so far is shown, so that we can see the Written Down Value; this is the remaining cost of the asset that is yet to be written off ( expensed ). So each financial year we can claim a bit more of the cost of the asset. PROFIT & LOSS BALANCE SHEET & Depreciation Schedule YEAR ONE Depreciation $1,000 Computer: At Cost $5000 Accumulated Depreciation 1000 Written Down Value 4000 10 YEAR TWO Depreciation $1,000 Computer: At Cost $5000 Accumulated Depreciation 2000 Written Down Value 3000 YEAR THREE Depreciation $1,000 Computer: At Cost $5000 Accumulated Depreciation 3000 Written Down Value 2000 YEAR FOUR Depreciation $1,000 Computer: At Cost $5000 Accumulated Depreciation 4000 Written Down Value 1000 YEAR FIVE Depreciation $1,000 Computer: At Cost $5000 Accumulated Depreciation 5000 Written Down Value 0! EFFECT ON CASH FLOW: When you PURCHASE an asset, this effects cash flow, but does not immediately reduce Net Profit. As you USE the asset you can DEPRECIATE it; this has no direct effect on cash flow, but reduces Net Profit.

Revisit double entry bookkeeping PURCHASE OF PLANT (Financed): If you purchased a new item of plant such as a forklift, and paid for it using Equipment Finance - what have you done? Someone else has paid for it, and now a liability has been created on the Balance Sheet, displaying the debt: Debit Plant Account (Asset Account) Credit the Loan Account (Liability Account) 11 A couple of points about this: The financial weight of both items is equal; the transaction balances. The Plant account on the balance sheet is an ASSET, and the new loan account is a LIABILITY. Assets have increased by exactly the same amount as liabilities. Net worth? No change. This is how it would appear in the accounting ledger: DATE DESCRIPTION DEBIT CREDIT 30/06/12 FORKLIFT (Plant Account) 65,000 LOAN ACCOUNT 65,000 The purchase of an Asset via a finance provision means that both Assets and Liabilities increase by the same amount, and Owner s Equity does not change.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Have a look at this transaction: The DEBIT ( Where the money went ) the money has gone into a forklift, so is showing in the financial accounts and reports (on the Balance Sheet) as an increase in ASSETS. The CREDIT ( Where the money came from ) the money came from the financier, creating a LIABILITY as they are expecting us to pay them back at the agreed time! Take a turn at this. Fill in the figures for a vehicle that you have purchased: Where did the money come from? What will you fill in on the credit side? Bank? Finance? 12 DATE DESCRIPTION DEBIT CREDIT / /20 MOTOR VEHICLES Remember the DEBIT and the CREDIT totals must be the same figure; the transaction MUST balance! FINANCE COACH 3 MONTH ACCOUNTING COURSE WEEK 1 INTRODUCTION TO ACCOUNTING This is an extract from 3MAC Week 1. Review that workbook if you require further help on Double Entry Bookkeeping H E L P I N G Y O U S E T & A C H I E V E Y O U R F I N A N C I A L T A R G E T S U B T A C C O U N T I N G & F I N A N C E

Back to Depreciation How is Depreciation accounted for? Depreciation is a non-cash transaction. That means that we don t actually write out a cheque for it or pay for it in any literal way, but as previously demonstrated it is real because our assets are declining in value. If we did not account for depreciation we would be over-stating our profits, because our assets would be listed at a value that exceeds their true value; they would be listed at purchase price, even though this most likely could not be achieved when we go to sell them. Depreciation entries are typically left to the accountant to calculate. Specific accounting software is mostly used to calculate this across all assets. Here is an example journal entry: 13 DATE DESCRIPTION DEBIT CREDIT 30/06/2011 DEPRECIATION (Profit & Loss) 1,250 ACCUMULATED DEPRECIATION (Balance Sheet) 1,250 Have a look at this transaction: The DEBIT ( Where the money went ) the money has gone into the depreciation expense account, so is showing in the financial accounts and reports (on the Profit & Loss) as an increase in EXPENSES. The CREDIT ( Where the money came from ) the money came from reducing the value of the plant & equipment on the Balance Sheet. Some points about this: The total amount of depreciation listed in the Profit & Loss statement will be just the depreciation for the financial period that the P&L is covering (from date A to date B). The depreciation for this period (the credit side of the journal) is added to Accumulated Depreciation which is the total of all depreciation for all assets owned for ALL periods. The financial weight of both items is equal; the transaction balances.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION What effect does depreciation have on our Balance Sheet? Assets (what we own) are reduced by the amount of the depreciation Total Assets = Total Liabilities + (Debt) Total Equity (Owners money) Debt (what we owe) does not change and because the depreciation was expensed on the P&L, Equity dropped by that amount (i.e. the Equity sub-account called Current Year Earnings is that much less.) TOTAL ASSETS = Total Debt PLUS Total Owners Funds! 14 It still Balances! Key Learning Point: Most Assets depreciate as they become older. It is as if they are consumed over several (in some cases, many) financial periods. Recording depreciation has the following effect: 1. It is added as an expense to the P&L, which has a flow on effect of reducing profits and also Owner s Equity. 2. Assets are reduced by the same amount (on the Balance Sheet).

Week 8 Section 1.72 DEPRECIATION SCHEDULE (Incl Asset Register) Often in a set of Financial Reports there is a supporting report known as the Depreciation Schedule. It itemises out all the main assets that the business has purchased in order to facilitate the money making process (i.e. running the business). For each asset the following sum is calculated: Price paid for the asset Less: Depreciation claimed so far Equals: Written Down Value of the Asset 15 MS Excel Download if you are a Finance Coach subscriber you can download these files as Excel Templates from www.ubtfinancecoach.com, and enter your data! Non-subscribers can purchase these templates via www.ubteam.com WHAT IS THE DIFFERENCE BETWEEN AN ASSET REGISTER AND A DEPRECIATION SCHEDULE? Asset Register - a list of all assets owned by the business. Typically it would show who each item was purchased from, who is the custodian of the asset, and where it is stored. It also may show details of services, maintenance etc. Depreciation Schedule - this shows all items, their purchase date, date that the item was first used, cost price, rate and method of depreciation, written down value at start of financial year, amount of depreciation charged this year, and closing written down value.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Balance Sheet Extract As you can see from this mock up example, you can drill into the financial reports and see exactly what makes up each figure. In this case we can see that this business has $ 2,880,929 of Non-current Assets; of this $ 76,557 is motor vehicles. By drilling into this further we are able to see exactly what vehicles make up the investment: Balance Sheet Extract Non-Current Assets Balance Sheet Extract Drilled in to Motor Vehicles 16 Non-Current Assets Building At Cost 1,874,513 Accum Dep n - 284,153 1,590,360 1,590,360 Land - At Cost 750,000 Goodwill - At Cost 225,100 Office Furniture At Cost 35,849 Accum Dep n - 7,845 28,004 28,004 Plant & Equipment At Cost 295,486 Accum Dep n - 84,578 210,908 210,908 Motor Vehicles At Cost 95,909 Accum Dep n - 19,352 76,557 76,557 MOTOR VEHICLES FORD - Janton Luter At Cost 25,125 Accum Dep n - 3,512 21,613 21,613 TOYOTA - Baven Creet At Cost 32,842 Accum Dep n - 5,485 27,357 27,357 KIA - Ker Spee At Cost 15,842 Accum Dep n - 5,142 10,700 10,700 VW - Kargo Van At Cost 22,100 Accum Dep n - 5,213 16,887 16,887 TOTAL MOTOR VEHICLES 76,557 TOTAL NON-CURRENT ASSETS 2,880,929 For each asset we can see exactly what was paid for it, and how much of this has been depreciated so far. Remember Accumulated Depreciation (on the Depreciation Schedule and the Balance Sheet) is a total of all the depreciation for this asset that has been expensed on the Profit & Loss over all financial periods since the asset was first used by the business.

Week 8 Section 1.73 ASSET COST The cost of the asset is the amount of cash or cash equivalents paid, or the fair value of the other consideration given, to acquire the asset at the time of its acquisition or construction (Taken from AASB 116). Examples of such costs include: The initial invoice cost from the supplier, excluding any GST/VAT Installation costs; this could include labour and / or materials. Delivery costs Fit out costs (eg. a delivery van having shelves fitted in it) Stamp duty (when applicable) Items that are excluded from the Asset Cost include: Goods / Services Taxes such as GST, VAT etc. Any fuel, oils etc. that are purchased to operate the machine Registration costs Insurance ASSET IMPROVEMENT: Expense or Capital? If the expense of an upgrade / improvement that is carried out on an asset increases the resale value, this extra cost would be normally be considered as increasing the capital cost of the asset, and would also be depreciated over time. If the expense was simply maintaining the asset, such as services and / or repairs, these are considered as keeping the asset safe and usable, and may be expensed in the period where the expense was incurred. Once again this is matching the expense with the income (GAAP). Another interesting point to note that if diminishing value depreciation is used (rather than straight line depreciation) the amount of depreciation is reducing each period. Typically this would be matched by an increase in maintenance costs as the asset ages. Total costs (on the Profit & Loss) for using the asset are: Depreciation + Operating Costs. 17

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION 18 Week 8 Section 1.74 CALCULATING DEPRECIATION The three main methods of calculating depreciation are: 1. Straight Line Depreciation - this assumes that an equal portion of the asset will be consumed in each period. The total cost is simply divided by the effective life (in years) and this amount is expensed each financial year. Where it is felt that there will be a remaining value (scrap value; this is known as the residual value ) of the asset at the end of the effective life, this is deducted before the depreciation is calculated. FORMULA: Depreciation Rate: 100% divided by Effective Life (in Years) Annual Depreciation: Cost divided by Effective Life (in Years) Accumulated Depreciation: Total of all depreciation charged against this asset Written Down Value: Cost less Accumulated Depreciation STRAIGHT LINE DEPRECIATION 200,000 Opening (WDW) Depreciation 1 2 3 4 5 6 7 8 9 10 11 2. Diminishing Value Depreciation - sometimes referred to as reducing balance method, this is used when an accelerated amount of depreciation is required at the start of an assets life, and this reduces as time goes on. It is calculated by a set rate of depreciation being applied to the opening written down value (also known as the carrying value ) of the asset in each period. As the assets WDV reduces, the same rate of depreciation (eg. 20%) gives a smaller depreciation amount. Note that residual value is not deducted using this method, as it is taken into account when the depreciation rate is arrived at. FORMULA: Depreciation Rate: 200% (may vary according to region) divided by Effective Life (in Years) Annual Depreciation: Opening WDV multiplied by Depreciation Rate Accumulated Depreciation: Total of all depreciation charged against this asset Written Down Value: Cost less Accumulated Depreciation

DIMINISHING VALUE DEPRECIATION 150,000 100,000 50,000-1 2 3 4 5 6 7 8 9 10 11 Opening (WDW) Depreciation 3. Units of Use Depreciation - where the average level of use of an asset can be calculated, the amount of this consumption for the period can be recorded and charged to the expenses for that period accordingly. For example a piece of machinery may cost $60,000, and have an expected life of being able to produce 200,000 widgets. It will then be sold for scrap metal value, estimated at say, $5,000. The depreciation per unit would be $0.275/widget. A counter would then be added to the machine to record its use. FORMULA: Depreciation Rate: Depreciation Cost divided by Effective Life (in Units) i.e. This is the Per Unit Cost Annual Depreciation: Actual Units of Use multiplied by Per Unit Cost Accumulated Depreciation: Total of all depreciation charged against this asset Written Down Value: Cost less Accumulated Depreciation 19 Here is a sample depreciation chart, with depreciation being based each year on the number of units that the asset has been used to produce. As you can see, a different number of units are produced each year. 120,000 100,000 UNITS OF USE DEPRECIATION 80,000 60,000 40,000 Opening (WDW) Depreciation 20,000-1 2 3 4 5 6 7 8 9 10 MS Excel Download if you are a Finance Coach subscriber you can download depreciation calculators as Excel Templates from www.ubtfinancecoach.com, and enter your data! Nonsubscribers can purchase these templates via www.ubteam.com.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION PURCHASE PRICE 100,000 + Tax Extra Costs: Installation 8,500 Delivery 2,500 ASSET COST 111,000 Effective Life 10 Years Residual Value 5,000 STRAIGHT LINE DEPRECIATION 20 END OF Opening (WDV) Depreciation Accum Dep'n Closing Amount Year 1 111,000 10,600 10,600 100,400 Year 2 100,400 10,600 21,200 89,800 Year 3 89,800 10,600 31,800 79,200 Year 4 79,200 10,600 42,400 68,600 Year 5 68,600 10,600 53,000 58,000 Year 6 58,000 10,600 63,600 47,400 Year 7 47,400 10,600 74,200 36,800 Year 8 36,800 10,600 84,800 26,200 Year 9 26,200 10,600 95,400 15,600 Year 10 15,600 10,600 106,000 5,000 5,000 106,000 DIMINISHING VALUE DEPRECIATION END OF Opening (WDV) Depreciation Accum Dep'n Closing Amount Year 1 111,000 22,200 22,200 88,800 Year 2 88,800 17,760 39,960 71,040 Year 3 71,040 14,208 54,168 56,832 Year 4 56,832 11,366 65,534 45,466 Year 5 45,466 9,093 74,628 36,372 Year 6 36,372 7,274 81,902 29,098 Year 7 29,098 5,820 87,722 23,278 Year 8 23,278 4,656 92,377 18,623 Year 9 18,623 3,725 96,102 14,898 Year 10 14,898 2,980 99,081 11,919 11,919 99,081

These two pages show the calculations that were used to produce the sample graphs on page 19. PURCHASE PRICE 100,000 + Tax Extra Costs: Installation 8,500 Delivery 2,500 ASSET COST 111,000 Effective Life 100,000 Units Cost to Write Off 106,000 Residual Value 5,000 Per Unit Cost 1.06 UNITS OF USE DEPRECIATION 21 END OF Opening (WDV) Units Depreciation Accum Dep'n Closing Amount Year 1 111,000 3,548 3,761 3,761 107,239 Year 2 107,239 9,845 10,436 14,197 96,803 Year 3 96,803 7,988 8,467 22,664 88,336 Year 4 88,336 15,486 16,415 39,079 71,921 Year 5 71,921 17,451 18,498 57,577 53,423 Year 6 53,423 9,541 10,113 67,691 43,309 Year 7 43,309 11,543 12,236 79,926 31,074 Year 8 31,074 9,542 10,115 90,041 20,959 Year 9 20,959 5,148 5,457 95,498 15,502 Year 10 15,502 2,154 2,283 97,781 13,219 13,219 92,246 97,781

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Week 8 Section 1.75 ACCOUNTING FOR DEPRECIATION Depreciation is normally calculated by the professional accountant of the business, and the total depreciation for all assets in that class (eg. Motor Vehicles, Plant & Equipment, Shop Fixtures, Office Furniture etc) is processed through the accounts as a single journal entry. This is how it appears in the accounting ledger: DATE DESCRIPTION DEBIT CREDIT 22 30/06/11 Depreciation (on P&L) 1,245 Accumulated Depreciation (on BS) 1,245 Have a look at this transaction: The DEBIT (Where the money went) the money has gone into the expense account called Depreciation, so is showing in the financial accounts and reports (on the Profit & Loss) as an increase in EXPENSES (i.e. operating costs / overheads). The CREDIT (where the money came from) the money came from reducing the value of the asset in the Balance Sheet account called Accumulated Depreciation. So the Balance Sheet account is building up, showing the total of all the depreciation that has been charged against this asset class; the expense account called Depreciation just shows the amount that has been charged in the current period. It is reset (to zero) at the end of the financial year.

What effect does depreciation have on our Balance Sheet? Assets are now worth less (as they get older) Total Assets = Total Liabilities + (Debt) Total Equity (Owners money) Debt has not changed and Equity dropped (ie the Equity sub-account called Current Year Earnings is less due to the Expense of Depreciation reducing Profits.) TOTAL ASSETS = Total Debt PLUS Total Owners Funds! A = L + OE 23 It still Balances! When we PAY THE CREDITOR, there is a movement of funds from Assets (i.e. Cash) to Liabilities (i.e. the supplier), so at this point Assets and Liabilities reduce by the same amount, and Equity does not change. So we can see that incurring expenses impacts the P&L and the Equity Account (in the form of reduced Current Year Earnings ), but not the Asset column. and paying for those expenses has an impact on Assets and Liabilities, but not Equity. The effect on Equity only occurs when the expense is incurred. Tax vs Management Accounting Depreciation It is worthwhile to briefly note that some large businesses may use a different rate of depreciation in their management accounts to what is allowable by the tax department. As this course has been developed for small business, we are not exploring this any further, but just wish to point out that it may occur.

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Week 8 Section 1.76 GAIN OR LOSS ON DISPOSAL When an asset is sold, the amount that it is sold for is compared against it s current written down value, so the gain or loss on disposal is calculated. If the item is actually scrapped (with no remuneration being received), lost or stolen, there are obviously zero proceeds. If an item is traded in (i.e. exchanged as part payment for another asset) then the amount allowed as a trade from the vendor becomes the proceeds amount from which the gain or loss is calculated. Using the figures on the Diminishing Value Depreciation section on page 19, let us look at two scenarios END OF Opening (WDV) Depreciation Accum Dep'n Closing Amount Year 5 45,466 9,094 74,628 36,372 24 Profit / Gain on Disposal: If at the end of year 5 the item was sold for $41,000 (plus tax), then as this is greater than the written down value (WDV) of $36,372, an amount of $4,628 is treated as profit, and will be declared on the Profit & Loss. TThis is usually listed separately from Sales, in a group called Other Income. Key Point to Remember: the total sale ($41,000) is not listed on the P&L, just the gain. Loss on Disposal: If at this same point the item was sold for $32,000 (plus tax), then a deduction is allowed on the Profit & Loss for the $4,372 difference. Once again the sale amount is not listed on the P&L, just the loss. Key Learning Point: Depreciation reduces the cost base to be used when calculating profit on the sale of an asset. If the sale proceeds exceed the WDV then a gain is recorded. If the sale proceeds are less than the WDV, a loss is produced. NB: WDV is the Written Down Value

Week 8 Section 1.77 LOG BOOK USE Whether the asset is a factory machine or a motor vehicle, accurate log book use means that the number of units (eg. hours, kms, miles) that are used can be recorded and accounted for. One of the main aims of the log book (regardless of depreciation method used) is to ascertain what portion of the use was business and what portion was private. EXAMPLE: Start Kms: 56,954 Finish Kms: 68,745 Distance Travelled: 11,791 Private Use Included (from Logbook): 2,187 (equals 18.5%) Total Operating Costs: $7,488 Private Portion (Drawings): $1,385 Motor Vehicle Cost (Overhead): $6,103 WHEN SHOULD I KEEP A LOG BOOK FOR MY CAR? The Tax Office in your region will most likely stipulate how often you should keep a log book, where you have both business and personal use. In Australia a log book must be kept once every five years for a period of 12 consecutive weeks (84 days). A new log book should be started if the pattern of use changes (for example you moved work premises, you introduced a second vehicle etc) If you purchase a different car, but use it in exactly the same way as the last one, you may use the same ratio of business/private use as per last logbook (which was ascertained on the previous vehicle). If you have commercial vehicles the log book as stipulated by the government authorities is usually sufficient for this purpose. 25

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION VEHICLE LOG BOOK SAMPLES: The main items required in a log book are: HEADINGS: Asset name Identifying features, such as an Asset ID, Registration ID etc. Location OTHER FIELDS COULD INCLUDE: Purpose (for example Business or Private) Cost Dept. (Sales, R&D, Admin etc) Other costs incurred (eg. Fuel) Clients (or Suppliers) visited Etc. Custodian LOG PAGES: Date Start reading (Hours, Kms, Miles or Units) Finish reading 26 Difference (in Excel this can be a calculated field) Notes:

VEHICLE LOG BOOK SAMPLES: Finance Coach have developed several log book samples that you can use in your business. See below for screen shots of two of them: 27 MS Excel Download if you are a Finance Coach subscriber you can download these files as Excel Templates from www.ubtfinancecoach.com, and enter your data! Non-subscribers can purchase these templates via www.ubteam.com

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Week 8 Section 1.78 LOW VALUE POOL Many regions have a tax ruling where low value assets may be pooled into a central account and a rate of depreciation applied to the pool as a whole. This saves tracking depreciation on individual small items. In Australia items between $100 and $1,000 can be added to the pool. The value of the pool at the beginning of the year is depreciated at 37.5% for the full year. All items that are added during the year are depreciated at 18.75% (i.e. half of 37.5%). Check with your accountant as to tax rules in your region, to find out how they apply to your entity type. 28 MS Excel Download if you are a Finance Coach subscriber you can download these files as Excel Templates from www.ubtfinancecoach.com, and enter your data! Non-subscribers can purchase these templates via www.ubteam.com

What s next? Here is what will be studied in the next two weeks: 1. One of the most important elements of a bookkeeping system that will contribute to accurate and timely reports, is one that correctly validates and classifies the financial transactions prior to processing. In Week Nine we look at how this is achieved, and what common mistakes are made that either result in false reports, or take extra time to resolve. 2. In Week Ten we are looking at ways to plan for financial control; this is the financial side of business planning, comparing where we are now with where we want to be, and developing a plan to get there. NOTE as to MS Excel Downloads Finance Coach have had exceptional tools and calculators developed and have made these available to clients globally. If you have a tool that you would like to see developed, or one that you have developed in your business that you would like to see made available to businesses worldwide, feel free to submit to: Tools.FinanceCoach@Ubtaccountants.com 29 We are also looking for suggestions and requests for templates, policies, procedures and more. We reward for ideas that we use! Thanks in advance

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION 30 Week 8 Key Terms GLOSSARY Accumulated Depreciation - the total of all depreciation charged against this asset since it was first purchased. Amortisation - the deduction of intangible capital expenses over a specific period of time. This method measures the consumption of the value of intangible assets, such as a patent or a copyright. Amortisation applies to intangibles exactly as depreciation applies to Plant & Equipment, and is computed over the asset s estimated useful life usually by the straight-line method. Asset - an item owned by the business. It may be tangible (like a car) or intangible (like a patent, goodwill etc). In each case it is assumed that it will have an economic benefit to the business, and could be sold or exchanged for another asset if required. Asset Register - a list of all assets owned by the business. Typically it would show who each item was purchased from, who is the custodian of the asset, and where it is stored. It also may show details of services, maintenance etc. Capital - although this term does have multiple meanings, when used in 3MAC we are referring to the money that the owner has available to invest in the business. The capital may be a mixture of cash and other assets (eg. cars). Capital Item - refer to Non-current Asset. Consume - the act of using up an economic benefit such as an asset. This could be due to use (wearing it out), obsolescence, deterioration etc. If the item purchased is to be completely used up in the current period (such as a tank of fuel) it is deemed as consumed at point that the expense occurs. If the item will continue to provide an economic benefit (i.e. be consumed ) after the end of the current financial year it is a depreciating asset, and a portion (representing the amount consumed) will be added to the P&L each period. Custodian - the person responsible for the care and protection of an asset. In the event of the asset being one that is being used or consumed in the normal course of business, this would usually also be the user of an asset. Depreciation - an amount that the value of the asset is said to be reduced by in a period. This portion is added to the expenses of the business in this period. Depreciation Schedule - shows all items, their purchase date, date that the item was first used, cost price, rate and method of depreciation, written down value at start of financial year, amount of depreciation charged this year, and closing written down value. Economic Benefit - something that will help the business in some way, especially if it will help the business to earn revenue. The benefit would be measurable in terms of money. Economic Life - the period (normally in years) that the asset is expected, under normal circumstances, to be usable to the business. Effective Life - refer to economic life. Expense - a cost included in the earning of revenue / income. If the expense related to an item that will be consumed within the current 12 month period, the matching principal allows that the cost is deducted immediately from income to arrive at profit. If the item will continue to provide an economic benefit past the end of the current financial year, the expense would normally be classified as capital in nature, and treated as a depreciating asset. Each period only the portion of the asset that is deemed as being consumed will be expensed, and the remained left on the Balance Sheet; this remaining portion is called the written down value.

Fixed Asset - refer to Non-current Asset. Internal Control - Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to: 1. conduct its business in an orderly and efficient manner 2. safeguard its assets and resources 3. deter and detect errors, fraud, and theft 4. ensure accuracy, and completeness of its accounting data 5. produce reliable and timely financial and management information 6. ensure adherence to its policies and plans. Log Book - a register showing usage of an asset. Depending on the asset type this may show start and stop distances (Kms/Miles), Units or Time. It would also list items such as asset ID and type, custodian name, location, private vs. business use etc. Non-current Asset - an item owned by the business that will provide an economic benefit for more than one trading year. If the item was only to provide a benefit for 12 months or less it would be classed as a revenue expense and deducted immediately. Residual Value - the recoverable amount for the asset at the end of its economic life. In some cases it is classed as the scrap value i.e. what will be obtained for the asset when it reaches the end of its life. Revenue Expense - costs incurred and consumed in the earning of revenue. If the expense was incurred but NOT consumed, or only partially consumed, the expense would often be classified as a capital purchase, and the asset added to the Asset Register. Written Down Value - the cost of the asset, minus any depreciation that has been deducted as an expense. 31 Make a note of any other new terms that you have learnt, and the explanation: Term Explanation

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION 32 POINTS TO REMEMBER FROM THIS WORKBOOK 1. Assets are the investments that the managers of the business have made use of to help produce revenue. These need to be properly maintained, secured and protected. 2. An item that is purchased and will be consumed in the financial period that it is purchased is expensed in that period. It becomes part of the overhead of running the business. 3. An item that is purchased and will provide an economic benefit to the business over multiple periods is called a Capital Purchase and is recorded as an Asset in the Balance Sheet. A portion of the asset is expensed in each period; this represents the portion that will be consumed during this period. This is known as Depreciation. 4. The depreciation portion is added to the Profit & Loss as an operating expense, as part of overhead. 5. The total depreciation for all periods is deducted from the asset, so that its value in the Balance Sheet is systematically reduced over time. The normal way this is listed is by showing the Non-current Assets in groups, with the total cost being displayed, and total depreciation deducted to also show a Written Down Value. 6. All the expenses, including the purchase price, that are incurred in acquiring and installing an asset become the cost base. This is the figure that depreciation is calculated from. Any sales tax (such as GST, VAT etc) is excluded from this calculation. 7. The three main methods of depreciation are: a. Straight Line equal portions deducted each period b. Diminishing Value a set percentage of the opening value is deducted each period. As the WDV decreases, so does the total deprecation charged per period. c. Units of Use this is where the cost of the asset is divided across the number of units that it is expected to service; and the units consumed are multiplied by this per unit cost to give depreciation for the period. 8. When an asset is disposed of (sold or otherwise) the WDV is deducted from the amount received (less any sales tax, GST etc). This will give a profit / gain or loss and this is added to the P&L to help arrive at taxable income.

Notes: 33

FINANCE COACH 3 MONTH ACCOUNTING COURSE ASSET REGISTER AND DEPRECIATION Notes: 34

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