Start Depreciation on a Fixed Asset After it is Placed in Service

We have an asset that we acquired and placed in service last year but it did not get entered into Bassets eDepreciation until several months later. How do we account for the depreciation we missed?

Yes, this is a tricky question and we have created a feature called Adjustment to Basis to handle this situation. If you enter the asset the purchase price on the original service date then depreciation will be calculated in the previous year and will change your prior accumulated number.

The solution is to enter the asset with zero cost to avoid any depreciation amounts. Then enter an adjustment to basis with a date when you want to actually start the calculation. Bassets eDepreciation will calculate the missed depreciation and then add that amount to the adjustment period.

Let’s look at an example. Below is an asset placed in service in October of 2015 without a purchase price. You can see that we then apply a $6,000 adjustment to basis with a March 2016 adjustment date:

Start Depre After Placed in Service 1

The $6,000 amount is easy to illustrate the effect since this results in $100 (6,000 / 60) depreciation amount per period. A 5 year life with 12 periods per year is shown below:

Start Depre After Placed in Service 2

Since this asset was place in service in October of the previous year, we missed 3 (Oct, Nov, Dec) periods of depreciation. Additionally we missed 2 periods (Jan, Feb) in the current year. So a March adjustment accounts for the 5 missing periods by adding $500 to the normal $100 to result in $600 of depreciation in the adjustment period. You can see that the remaining life is then calculated at the normal $100 per period.

Adjustment to Basis is a very powerful feature that allows you to adjust depreciation basis without impacting monthly depreciation that has already booked to your general ledger. This is just one example but there are many other situations where this feature can account for changes in cost.

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

Adjust Depreciation Going Forward Without Changing the Past

Q and AWe often get questions from our clients regarding changing the cost of an asset. Here is an example:

Over the past 6 months we have returned a number of assets. What is the best way to record these returns in Bassets eDepreciation? We need to:

  1. Record the returns and see the offset in depreciation for the current months.
  2. Adjust the books value in a way that future depreciation taken is only the purchased amount less the returns. All of these returns are only part of the original fixed asset cost.

Here is our reply:

The best way to solve this problem is with a negative Adjustment to Basis. The concept of what it does is as follows:

  • Assume computer hardware cost of $5,000.00, acquired October 2012.
  • Depreciation is straight line with a full month convention over 5 years (60 months) which yields $83.33 per month in depreciation ($5,000/60).
  • April 2013, $2,000.00 of damaged material is returned to vendor.
  • The Adjustment to Basis in the case of a refund is entered as a negative$ 2,000.00 with an April 2013 effective date.  This yields a negative or offsetting depreciation of $33.33 per month
  • The six months of prior negative $33.33 per month is taken in April 2013, the effective date of the Adjustment to Basis.  Therefore, your prior accumulated depreciation as of the end of March 2013 will not change.
  • Your April depreciation will be $83.33 minus $233.31 ($83.33 * 7 periods) to result in negative $149.98.
  • May depreciation and going forward would then be $50 ($83.33 – $33.33).

This is a very powerful feature that allows you to adjust depreciation basis without impacting monthly depreciation that has already booked to your general ledger. Use this feature to deal with returns like in the example above or additional charges that are incurred after the initial purchase. For more information on this feature, click on the related post below:

Change The Basis of an Actively Depreciating Asset: http://www.depreciationguru.com/2012/10/change-the-basis-of-an-actively-depreciating-asset/

Questions or comments on this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Change the Basis of an Actively Depreciating Asset

The amount paid for an asset is the foundation for depreciable basis. This amount is the cost plus any additional expenses related to the acquisition. Depreciation will begin when an asset is placed in service and the basis is used as the starting point. Occasionally not all of the costs are known when the asset is placed in service. In these instances an adjustment to basis is necessary.

Bassets eDepreciation allows you to enter a date and dollar amount for each adjustment. The adjustment amount can be either positive (additional cost) or negative (credit) with an associated effective date:

Change the BasisW

 

This situation often occurs with shipping costs or other charges that are received a few months after the initial purchase. Conversely a credit may occur if there is a rebate or over charge on a purchase.

If you tried to deal with this situation by just altering the initial cost, then this would impact the depreciation for earlier months that have already been booked to your general ledger. By including an effective date, Bassets eDepreciation maintains the original calculations and only adjusts monthly depreciation going forward. When depreciation is calculated for this asset record, any prior amounts before the adjustment date will be added to the current depreciation as of the adjustment date. Any missing depreciation for the prior periods will be accounted for in the month of the adjustment.

As you can see, adjustment to basis is a simple solution to what can sometimes be a tricky problem. Dealing with additional fees, charges and even credits can be handled going forward without impacting prior months.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Making Adjustments to Depreciation

When calculating depreciation, there are many variables (Cost, Depreciation Method, Recovery Periods, First Year Convention and the accuracy of the original calculation) involved that impact the depreciation amount calculated for each accounting period.  This complexity causes differences between software packages.  Since the previously calculated numbers have already been entered into your General Ledger, new software needs to adjust its calculation to “match” the existing total accumulated depreciation amount.

This is accomplished by calculating depreciation and then comparing its calculated amount to your existing total accumulated depreciation.  The difference between the two numbers becomes the adjustment amount.

The key concept that sometimes causes confusion is the adjustment date.  Since the new calculation needs to be adjusted to match your existing total accumulated depreciation, a date must be assigned.  This ensures that the calculations match “as of” the adjusted date.

Example:

  • Old Calculation   $100
  • New Calculation$ 90
  • Adjustment$ 10

Your total accumulated depreciation “as of” the close of the selected accounting period becomes the “Opening Balance” in a new software package.  Reports run AFTER the adjustment date will be accurate.  Reports run BEFORE the adjustment date WILL NOT match original historical calculations, since the calculation is generated by the new software program.

Switching to a new software package for managing fixed assets and calculating depreciation can be a challenge.  Make sure you choose a solution that supports adjustments to depreciation to ensure consistency with the numbers already posted to your General Ledger.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.