Assets are items of value owned by a business (for example land, building, equipment, and office furniture). The business uses its assets to create income. For example, an Ice Cream Van is an asset that is essential for a mobile Ice Cream business to earn income.

It is important to distinguish between expenditure on assets from ordinary business costs. When a business incurs an ordinary business cost such as electricity or wages, the total value of the cost is "written off in the year it is incurred". However when a business expends money on a fixed asset, the cost is "written off over a number of years". The number of years depends upon the ruling from the Australian Taxation Office who produce the booklet A Guide to Depreciation

For instance if you bought a computer on 1 January 1997 for $3,000, the asset would be written off as follows:

For the year ended 31 December, 1997	$1,000	33%
For the year ended 31 December, 1998	$1,000	33%
For the year ended 31 December, 1999	$1,000	33%
Total write down over three-year period	$3,000	100%

     

The above example would hold true if the allowed depreciation were 33%. If the rate of depreciation were 20% then it would take 5 years to write down the asset completely.

For the majority of businesses, the rate of depreciation effects profitability and the amount of tax that the business pays. This is because depreciation is a tax-deductible expense. The higher the rate of depreciation the more the business can reduce its tax bill in a given year. Many recreation organisations are non-profit organisations and do not pay therefore any tax. However even in such organisations it is still necessary to follow the rates of depreciation set down by the tax office.

Additions and Disposals

In order to calculate the total value of a businesses' assets and the total of amount of depreciation, it is necessary to accurately record details of every purchase (addition) of a fixed asset and every sale (disposal) of a fixed asset.

The following details should be recorded:

Additions	Disposals
The date of the purchase of the asset	The date of the sale of the asset
The supplier of the asset	The purchaser of the asset.
The cash price of the asset at the time of its purchase.	The cash price that the asset was sold for
Details of the asset	The total of accumulated depreciation at the time of the sale.

The requirement to keep such details requires the construction and maintenance of an Asset database or register.

Example of the required record keeping for an asset - a vehicle over the period that it was owned by a business.

The details can be kept in a card database:

Make: Mitsubishi		Model: Magna Wagon		Year: 1995			Supplier: Keema Mitsubishi
Purchase Price: $30,000				Date of Purchase: 1/05/95
Date	Depreciation Rate		Depreciation  Method			Depreciation  Charge		Net Book Value
31/12/95	12%		Straight Line			$2,400.00		$27,600
31/12/96	12%		Straight Line			$3,600.00		$24,000
1/2/97	12%		Straight Line			$300.00		$23,700
Disposal Price: $23,000					Date of Disposal: 1/02/97
Profit/Loss on Disposal: ($700)

The assets register can also be easily kept using computer database software such as Microsoft Access or on a spreadsheet e.g. Microsoft Excel.

The above example, the Net Book Value represents the reducing value of the asset as depreciation is deducted.

Calculating depreciation

Because assets are being bought and sold at different times, and because different rates of depreciation apply to different assets,  it is not usually possible to assess TOTAL depreciation accurately by any way other than working out depreciation on an individual asset basis.

To further complicate the problem, there are two different ways to calculate depreciation:

·         Straight line method

·         Reducing balance method

Straight line method -  if an asset costs $100 and the rate of depreciation is 20% per year, the amount of depreciation each year will be $20.00 (the purchase price [$100] * the rate of depreciation [20%]) .

Reducing balance method - if an asset costs $100 and the rate of depreciation is 20% per year, in the first year the depreciation will be $20, in the second year $16.00, in the third year $12.80, and so on as per example below: