DEPRECIATION OF CAPITAL GOODS OR ASSETS

DEPRECIATION OF CAPITAL GOODS OR ASSETS

Instrumental assets, or assets, are the assets purchased by the company to be used in the production process and / or necessary for carrying out the activity over several years. Instrumental assets therefore represent fixed assets in all respects from the point of view of their specific economic use and must be entered in the assets of the balance sheet.

TANGIBLE AND INTANGIBLE ASSETS

Instrumental assets can be divided into two broad categories, tangible and intangible.

DEPRECIATION OF CAPITAL GOODS

The cost of these goods is not fully deductible in the year in which the purchase is made, unless it concerns goods with a purchase value of less than € 516.46, therefore the deduction must be spread over time according to the provisions of the Coefficients. depreciation for capital goods linked to the business activity and to the type of asset.

The procedure used to spread the cost of the Capital Goods is called Depreciation. Companies are obliged to keep the Asset Register where all transactions relating to the asset are noted, such as the purchase cost, the annual depreciation values, any demolition or sale to third parties.

General rules

Let’s now see a list of the general rules to correctly apply the management of assets and their depreciation in compliance with the law.

• The depreciation rates for capital goods are deductible starting from the year in which the asset comes into operation.
• The deduction is allowed to the maximum extent calculated on the basis of the coefficients established by the Minister of Economy and Finance.
• The coefficients are reduced by half for the first financial year, or you can opt for “punctual” depreciation by calculating the proportion of days (or months) of use in the financial year.
• In case of elimination of assets not yet completely depreciated from the production complex, the residual cost is allowed as a deduction.
• For assets whose unit cost does not exceed € 516.46, the full deduction of the acquisition costs in the year in which they were incurred is allowed, without therefore proceeding with any depreciation. The asset must also be registered in the Asset Register and contribute to the formation of the company assets.

Let’s see a practical example from which we will then derive the examples of the accounting entries that we are going to do below. Suppose we acquire an instrumental asset with a cost of € 10,000.00 which has a depreciation rate of 12.5% ​​(depreciation over 8 years) and to use the depreciation at 50% for the first year.

The first column indicates the amount that we will amortize starting from the first year to the ninth, when the amortization of this asset will end. In the second column the value of the accumulated depreciation account which increases from year to year. In the third, the residual to be amortized, as indicated in the asset sheet in the Asset Register; the value decreases from year to year until it reaches zero on completion of the amortization in the ninth year.

ACCOUNTING ENTRIES FOR DEPRECIATION

The accounting entries relating to depreciation are made at the end of each financial year, usually on 31/12 of each year, except for particular financial years with a frequency not coinciding with the calendar year.

Purchase registration

When the good is purchased from the Supplier we will make the following purchase registration with which we will assign the taxable value of the good to account 110.40 [DIFFERENT EQUIPMENT]:

Here is the registration in the Amica Management System :

Registration of purchase of capital goods

It should be noted immediately that the destination account of the taxable value of our purchase, contrary to the usual, has gone to move a balance sheet (110.40) and not an income statement, as happens if instead we purchase consumer goods or services. This has an immediate consequence. At this moment our income statement (therefore the result for the year) is not affected by this purchase, it remains completely unchanged; will be affected by this operation only at the end of the year when we go to make the amortization.

Depreciation at the end of the year

Now, on the basis of the amortization plan indicated above, we will go to make the registration for the first year and then one of those relating to the following years (which will all be the same) and finally that relating to the last year, in which the depreciation. The first thing to do is to create the depreciation account in the Income Statement under the heading Costs. Within Account 300 we will create sub-account 50 called TANGIBLE ASSET DEPRECIATION

Posting of depreciation at the end of the year

In this way we will have in the costs of the year the amount of € 625.00 (which will decrease our net result) and we will have reduced the fixed asset set up in the balance sheet by the same amount.

Registration for the following seven years will therefore be:

And finally that for the last year, with the closing of the depreciation:

Once all the registrations have been made, the account number 110.40 will be reset. Once you understand the mechanism, the registrations are easy to do, in this way you can become completely autonomous even in the management of Instrumental Assets.

Depreciation of assets worth less than € 516.46

For assets with a value of less than € 516.46 it is possible to depreciate them immediately and entirely in the year of purchase and / or entry into operation. In this case, the purchase registration will not set aside the value among the fixed assets, but will directly enter the value of the asset at the cost of the year, therefore in the Income Statement.

Let’s suppose you bought a tablet costing € 400.00. For your registration we will proceed as follows: first we create the sub-account 100 under account 300 called INSTRUMENTAL GOODS <€ 516. We will then make the following registration:

Registration of an asset with a value of less than € 516.46

As is clear from the registration, the cost of the asset will fall entirely on the current year.

PLEASE NOTE: immediate depreciation for assets of less than € 516.46 is a possibility and not an obligation. So whoever deems it convenient takes advantage of it, whoever prefers to carry the asset in ordinary depreciation can easily do so.

WRITE-DOWNS

This is a thorny issue that is sometimes difficult to understand, due to its many aspects, sometimes not easy to evaluate. The devaluation of an asset owned by the company MUST (it is not optional) be made when special conditions occur, the main indicators of which are listed:

• significant unforeseen decrease in market value;
• significant technological, market or regulatory changes, with a negative effect;
• increase in market interest rates or other rates of return on investments capable of significantly modifying the discount rate used in calculating the value in use and reducing the fair value;
• carrying amount of assets higher than their estimated fair value;
• obvious obsolescence or physical deterioration of an asset;
• significant changes to the company in the way an asset is used with negative effects such as: unused assets, disposal plans, redefinition of useful life, expected future economic performance worsening.

In these cases, the devaluation of the asset subject to loss of value must be made. This can, in some cases, be painful as it represents a deadweight loss of value of your company, especially if the devaluation is of high value. Let’s see how it is recognized in the accounts, assuming that the asset we have placed in charge above suffers at some point a devaluation of € 1,000.00.

Let’s start by creating within Account 300 the sub-account 120 called TANGIBLE FIXED ASSETS. Then we proceed with the following registration:

Recording of a devaluation of an instrumental asset

In this way we will have a loss of € 1,000.00 on the current year and we will, however, have reduced the portion of the asset to be amortized by € 1,000.00. From this moment on, we must recalculate the residual depreciation rates on the basis of the new residual value of the asset which has decreased by € 1,000.00.

REVALUATIONS

Except for absolutely exceptional events, current legislation does not allow revaluations beyond the maximum value of the asset. In fact, this means that revaluations are allowed only as a recovery of value after a devaluation. If the condition occurs, the provisions for write-downs must be applied but with reversed signs. As a rule, if the devaluation was made with good reason, that is for a non-transitory reason, but a structural one, the need to revaluate a devalued asset also becomes a sporadic and exceptional case.

THE REGISTER OF DEPRECIABLE ASSETS (OR REGISTER OF ASSETS)

All the tangible and intangible fixed assets of the company or professional must be recorded in the Register of Deprectible Assets. This is a register for which there is no obligation to authenticate. They are obliged to fill in this register:

• corporations;
• public and private entities other than companies subject to IRES;
• trusts whose sole or main purpose is the exercise of commercial activities;
• partnerships;
• natural persons who carry out commercial businesses;
• exhibitors of arts and professions.

Since 1997, the keeping of the register can be replaced by a series of other alternative obligations theoretically aimed at simplification, but which in fact do not make it easily replaceable, above all to have an always updated and precise picture of the situation of the assets and relative depreciation. The data (which can always be customized according to the type of asset in question) to be entered in the register concern:

• the year of acquisition of an asset;
• the original cost;
• any cases of revaluation and / or devaluation;
• the accumulated depreciation achieved in the previous period;
• the depreciation coefficient actually applied in the tax period;
• the annual amortization fee;
• eliminations from the production process.

Here is an example of the sheet relating to an asset with the relative annual depreciation rates and other information:

Example of a form of the Register of Assets

Any company or professional in his life needs to deal with depreciation and with the Register of Instrumental Goods. It is good to know the subject in depth in order to avoid errors in operations and also take full advantage of the potential offered.

I give you an appointment at the next article where we will deal with the subject of inventories.