Depreciation Rounding Errors: It’s Time to Solve Them

Rounding errors have traditionally been an issue found when using depreciation software.  The problem comes from the basic division of asset cost over a number of periods.  For example, take a fixed asset with a cost of $1.00 spread over 3 months.  This would result in $.33 per period, but when multiplied by 3 periods would calculate a total of $.99, not the $1.00 you would expect.

The traditional solution has been to round numbers for presentation, but then add the actual numbers to ensure accurate totals.  So the calculation would result in.333333333 for each period, but only display .33 in reports.  Then when a report is run for a selected quarter (i.e. 3 periods), the resulting total would be 1.00.  This leads to some confusion as illustrated in Table A-1 below:

Bassets “Precision Rounding” solves this problem by evenly distributing the total cost over x-1 periods, where x is the total number of periods.  Each calculation is rounded up or down to the nearest penny.  The cumulative total of the rounded values will be accounted for in the last period.  The new solution is shown in the right column of table A-1:

(Click Image for a Clearer View)

(Click Image for a Clearer View)

Traditional solutions only store the calculated results for the current period.  Whenever a report is run, a calculation is executed to determine the depreciation numbers for the selected period(s).  Other systems will force a “hard close” to ensure the calculated totals are stored and do not change.

Bassets eDepreciation further attacks this problem in a new way.  Each individual calculated period value is stored to a detailed database record.  Then, when a report is run, a calculation is not necessary.  The individual periods are simply added up to generate a cumulative report.  This ensures absolute accuracy and consistency since the math is all standard addition, not division.  To further illustrate how this is applied to depreciation software, here is a more real world example.  Consider an asset with a cost of $1,000 that needs to be depreciated over 3 years (3 years × 12 months = 36 periods).

In most versions of depreciation software, the cost of $1,000 divided by 36 periods, yields $27.77778 per period which rounds to $27.78.  This creates several rounding problems:

1.The annual totals appear incorrect (27.78 ×12 is not 333.33)
2.The cumulative total of 1,000 appears to be the total of 333.33 × 3 years
3.The sum of the 36 period (27.78 × 36 ≠1,000 as shown.  Rather, 27.78 × 36 =1,000.08)

eDepreciation solves this problem.  In this screen shot, you can see a comparison of of an older system (left) to the new eDepreciation software (right).  By comparing the two, you will notice the rounding problem is solved by eDepreciation in that the rounded numbers are in fact the actual calculations.  Any rounding differences are then accounted for in the last period of the assets life.  So, 27.78 * 35 periods equals 972.30 and the balance (27.70) is the amount for the last period.

This allows the first 2 years to correctly total 333.36.  Any calculations run for a range of periods (Quarter, Annual, etc.) will always total the sum of the individual periods.

This “Precision Rounding” eliminates the need for a monthly hard close and ensures that all reports totals will match to the penny.  The actual difference in this calculation over the entire life of an asset will never be more than ½ penny for each period.  So, the worst case scenario for a 10 year asset (120 periods) would be 60 cents.  (120 periods × $.005 = $.60)

Remember, while rounding errors that are only pennies per period may not seem to be a big deal, they can in fact have a huge impact.  Consider the implications when having such errors on thousands of assets.  The wrong information can affect how a company makes decisions.  Thus, why not take advantage of the opportunity to solve this issue?

For more information on how to overcome rounding issues when doing your calculations, please feel free to contact us via the comments or questions page.

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.