Chapter 12
How depreciation is worked out
The methods and conventions, in plain English.
You don't need to know any of this to use the program, but it helps to know what it is doing.
Each month, the difference
For every asset in every book, the program knows what should have been depreciated in total by the end of any month. When a month is closed, it posts the difference between that and what has already been posted. Usually that is just the normal monthly amount. But it also means late entries catch up, back-dated disposals reverse what they should, and closed months never change.
The methods
| Method | How it works |
|---|---|
| Straight-line | Cost less salvage, spread evenly over the life. |
| 200% / 150% declining balance | A fixed percentage of the remaining book value each year, switching to straight-line when that gives more. |
| MACRS (200%, 150%, straight-line / ADS) | The federal tax methods, using the IRS percentage tables (Publication 946). Salvage is ignored. Section 179 comes off first, then bonus depreciation, then MACRS on what is left. |
| Group rate (Part 32) | Cost times the account's annual rate, divided by 12, from the month after the asset is placed in service through the month it is retired. When an asset is retired, its cost and removal cost (less salvage) are charged to the reserve, with no gain or loss. |
| Not depreciated | Land and construction in progress. |
The conventions
| Convention | Meaning |
|---|---|
| Full month | A full month in the month placed in service; none in the month of disposal. |
| Mid-month | Half a month at the start and at the end. |
| Next month | Starts the month after it is placed in service. |
| Half-year | Half a year in the first year and in the year of disposal, whatever the month. |
| Mid-quarter | As if placed in service (or disposed of) in the middle of the quarter. Required for tax when more than 40% of the year's property is placed in service in the last quarter; the tax report checks this. |
Opening balances and changes
- Imported assets carry on from the accumulated depreciation in your spreadsheet. Straight-line spreads what is left over the remaining life; MACRS carries on with the IRS table and settles any difference in the last year.
- A change "from now on" restarts the schedule from what has actually been posted. A change "from the start" recalculates as if the new figures had always applied.