Some accountancy questions

frobisher

Is there a formula for working out the depreciation on a capital acquisition? Also, in a business plan preparation, what seperates a direct expense from a fixed overhead?

Kinetic^

frobisher wrote:

Is there a formula for working out the depreciation on a capital acquisition? Also, in a business plan preparation, what seperates a direct expense from a fixed overhead?

Hi Frobisher,

Straight forward part first.......Direct expense would be marketing of a product and a fixed overhead would be rent.


A depreciation rate must be chosen by you.

Cars are usually 20%, Fixtures & Fittings 12.5%, computer equipment 33.3%........just examples of course but they're generally the most common rates I've come across in any job I've done.

frobisher

Kenny 5 wrote:

Hi Frobisher,

Straight forward part first.......Direct expense would be marketing of a product and a fixed overhead would be rent.

Hi Kenny,
I'm still unsure about the direct expense v fixed overhead thing. I have a template for a business plan from a company I was previously involved that I'm using and it shows property costs as being part of fixed overheads. Is this incorrect?

For depreciation I was thinking of deducting the amount of the item's resale value after the term of it's commercial use from it's initial purchase price. Example: Item costs €100,000, term of use is 5 years, resale value €20,000, depreciation = €80,000 divided over 5 years. Would that make sense?

Kinetic^

No that's correct for the fixed overheads.

I don't want to bore with you with jargon but when setting up a sole trader/company/partnership, one must adopt accounting policies.....like depreciation. So your accounting policy would be to depreciate said class of asset at a rate of 20%. Re-sale value is as you say going to happen but cannot be recognised until it actually happens so you must depreciate the full cost of the asset (less any re-claimable taxes like VAT).

frobisher

I have to decide on a figure so, would 20% be acceptable for a technological capital acquisition?

Kinetic^

Yeah sounds ok, if you feel the equip has a shorter economic useful life then increase the %.

frobisher

Thanks for the advice Kenny 5.

Kinetic^

Hey no bother man, if you've anymore let us know and we'll be glad to help.

ircoha

most tech assets have v short lives

also consider tax position as tax depreciation, or capital allowances are different to published accounts depreciation which are driven by the accounting policies which are the directors responsibilities and they should not be aggressive, ie in this case 10% pa is aggressive, 20% a bit iffy, 33.3% more like it, 40% a bit conservative

pigeonbutler

When depreciating assets you are allowed to account for them having a residual value at end of useful life.

So if it costs €100,000, it'll be worth 20,000 at end of useful life (5 years) you can charge 16,000 for 5 years. At end of 5 years any sale proceeds greater or less than the 20,000 will be recognised as a gain or loss.

So no. You don't have to depreciate the full cost of the asset.

Ircoha is on the right track there, tax won't be effected by your depreciation rate, since accounting depreciation isn't deductible with the capital allowance system used instead.