We are disposing of a fixed asset. Should depreciation be charged in the final year of sales? If not what is the reason
Related resources
Replies (11)
Please login or register to join the discussion.
Your accountant can tell you
This is a fairly simple accounting convention, so your accountant will be able to fill you in on this. They will also be able to deal with the effect on capital allowances, which may well be different depending on the nature of the asset and how it has been treated for tax in the past.
The common convention is not to charge depreciation in the year of disposal, but there is nothing wrong in doing so. Your accountant will be able to explain what policy has been adopted in the past, so that you can be consistent.
At the end of the day it doesn't matter
Common practice is either to charge the appropriate portion in both year of acquisition and disposal, or full charge in year of acquisition and none in year of disposal. But I have come across other permutations. In any event, the amount that is charged (or not charged) will simply be mirrored in the amount of the profit or loss on disposal - which is little more than an adjustment to depreciation by another name.
Management accounts
My preference is to not depreciate in the year of disposal.
However some clients that I have run their own monthly management accounts and include a monthly depreciation charge, then when there's a disposal the choice arises / decision has to be made "do we reverse this year's monthly depreciation or not?". To me, in these circumstances the commonsense anserrw is "no" leave as is. Either way tax charge and net profit is unaltered.
Depreciation is a attempt to spread the difference between the acquisition cost and disposal proceeds (if any) of an asset over the asset's useful life
My firm's approach was to adjust the depreciation charge in the disposal year so that the
cost less the cumulative depreciation equalled the disposal proceeds
A lot of people follow foxtrot's method: the problem comes, though, when you get unexpectedly high proceeds and then you can end up with negative depreciation!
Negative depreciation
Otherwise known as "Profit on disposal of fixed assets".
Yes but not in Foxtrot's firm apparently.
The problem is the same whether or not you get a "loss" on disposal or a profit" - it isn't either really - it's just an indication of the extent to which the provision was excessive or inadequate
We just have a line in the accounts which is titled "depreciation" if it happens to be a credit
it's in brackets. We do the same for bad debts, after all if this were a credit you wouldn't describe it a "profit", though you might title it "bad debt provision released"
I always depreciate and apportion in the final year; and then adjust through profit/loss on disposal.
I believe depreciation isn't just for accountants. I always advise clients that it is what they should be "setting aside" to replace that asset over it's useful life. The profit/loss shows the net result of the asset in plain terms for the client.