In this article we explain what amortizations are and their application in the accounting field.
Learn the key concepts for calculating depreciation, as well as various amortization methods that companies can apply.
Post content
Amortization is used to record the wear and tear or depreciation of a fixed asset as an expense in the accounting period , to the extent that it has contributed croatian email list to generating income for the company.
A company's fixed assets consist of tangible and intangible assets. The main characteristics of these assets are:
They are not intended for sale, as they are used in the company's permanent and productive activity.
Its useful life goes beyond the duration of a financial year.
There are fixed assets with very high amounts, such as machinery and industrial warehouses, which if fully recorded as expenses in a financial year would distort the accounting and tax results.
SMEs usually determine the depreciation rates at the end of the financial year. This task can be very simple, if you use software such as Sage 50. If you use spreadsheets, it can be a little more complicated and take more time.
Download your FREE copy of the “Basic Kit for Keeping Your Accounting Up to Date”
Amortization is the expression of the systematic and effective depreciation suffered by fixed assets due to their application to the production process.
This reflects, in the assets section of the balance sheet , this reduction in the value of the fixed assets available to the company to carry out its activity.
Start of marked textSHARE IT! Discover, step by step and from scratch, how to calculate your company's depreciation.End of marked text
2) Key concepts for calculating amortization
When calculating amortization, there are three key concepts that should be clear:
Useful life. This is the estimated time during which the asset is expected to be used in the company.
Residual value . This is the estimated value that the asset could have at the end of its useful life.
The basis for amortization. The acquisition price or production cost will be amortizable , excluding, where applicable, the residual value.
Amortization base = initial cost – residual value
With an integrated accounting and business management solution like Sage 50, it will be much easier for you to keep your accounts and calculate your amortization rate.
3) Amortization methods that the company can apply
According to the Corporate Tax Law (LIS) , depreciation will be effective when it is carried out in accordance with one of the methods established in the LIS and developed by regulation. To this end, amortization tables are established , with linear coefficients and maximum amortization periods , establishing freedom of amortization for low-value assets.
Three different depreciation methods can be used , depending on the nature of the asset and its intended use.
Straight-line or constant : the constant method is applied to items that lose their value equally throughout their useful life. In this method, the same percentage is always applied each year in which the fixed asset is depreciated.
Decreasing digit numbers : applied to fixed asset items that lose more value at the beginning of their useful life, so that a greater amount is amortized at the beginning of the fixed asset's useful life.
Increasing digit numbers : applied to those elements that lose less value at the beginning of their useful life.
Units of Production – Depreciation expense is based on the expected utilization or production of the asset.
The choice of the depreciation method for each fixed asset must faithfully adjust to its loss in value curve.
Once a depreciation method has been chosen, it must be maintained until the end of the asset's useful life.
4) How to correctly calculate and record depreciation?
To correctly perform amortizations we must follow a series of steps:
Identify fixed asset invoices correctly for accounting purposes. It is not unusual for certain fixed asset invoices to be recorded as expenses in a financial year. In addition, these invoices must detail that they are capital goods for VAT purposes .
The start date of the amortization process is the date on which the fixed asset is put into operation.
Once we are clear that we are dealing with a fixed asset, we must record it in the accounting records.
In parallel with the fixed asset accounting record, we must open an associated depreciation account . The objective is to accumulate the depreciation that is recorded in the different financial years.
In preparation for the closing of the financial year and before calculating depreciation, we must verify that the fixed assets recorded in the assets section of the balance sheet are in the company and are operational. We must carry out this check, since the company may have disposed of certain fixed assets due to breakdowns or obsolescence. In other words, without notifying the accounting department.
