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Accounting for depreciation in the final year of sale

Accounting for depreciation in the final year...

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We are disposing of a fixed asset.  Should depreciation be charged in the final year of sales?  If not what is the reason

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Stepurhan
By stepurhan
23rd Jan 2015 09:18

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.

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By johngroganjga
23rd Jan 2015 09:52

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.

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By BKD
23rd Jan 2015 09:58

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.

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By DMGbus
23rd Jan 2015 14:02

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.

 

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By foxtrot
23rd Jan 2015 14:45

 

 

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

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By TerryD
23rd Jan 2015 16:23

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!

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By BKD
23rd Jan 2015 16:39

"Negative depreciation"

Otherwise known as "Profit on disposal of fixed assets".

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By johngroganjga
23rd Jan 2015 16:50

Negative depreciation

BKD wrote:

Otherwise known as "Profit on disposal of fixed assets".

Yes but not in Foxtrot's firm apparently.

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By foxtrot
23rd Jan 2015 17:49

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"

 

 

 

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By BKD
23rd Jan 2015 18:33

That's the point that I was making

It really doesn't matter what you call it.

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By Gmb
23rd Jan 2015 22:49

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.

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