Fixed Asset Accounting Process and Flow in SAP ERP

Meaning : Depreciation is the systematic distribution of a fixed asset's cost over its useful life. This is applicable only to tangible assets. This practice helps businesses match the expense of using an asset with the revenue it generates over time.

Why is Depreciation Important?

Financial Reporting: It helps in accurately reflecting the value of assets on the balance sheet.

Tax Purposes: Depreciation can reduce taxable income, as the expense is deducted over several years.

Expense Matching: It aligns the cost of an asset with the revenue it generates, adhering to the matching principle in accounting.

Common Depreciation Methods:

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1.????? Straight-Line Depreciation: This method spreads the cost evenly over the asset’s useful life. For example, if a machine costs $5,000 and has a useful life of 5 years with a salvage value of $1,000, the annual depreciation expense would be $800.

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Calculation: Depreciation expense = (Cost of the asset - Salvage value) / Useful life

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2.????? Declining Balance Method: An accelerated method where higher depreciation expenses are recorded in the earlier years of the asset’s life.

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Calculation: Depreciation expense = Book value at the beginning of the period × Depreciation rate

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3.????? Double-Declining Balance Method: An even more accelerated method that doubles the rate of the declining balance method.

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Calculation: Depreciation expense = 2 x Beginning book value x Rate of depreciation

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4.????? Sum-of-the-Years’ Digits (SYD): Another accelerated method that depreciates more in the earlier years.

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Calculation: Depreciation expense = (Remaining life span / SYD) x (Cost ? Salvage value)

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5.????? Units of Production: Depreciation is based on the asset’s usage, activity, or units produced.

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Calculation: Depreciation expense = [(Original value - Salvage value) / Estimated units produced over asset's lifetime] x Actual units made per accounting period

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Impact on Financial Statements

• Income Statement: Depreciation expense reduces net income.
• Balance Sheet: Accumulated depreciation reduces the book value of assets.

Accounting Flow:        

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• 1.????? Dr. AUC??????????????? XXX?????????????????????? (Once goods receipt is done through MIGO agt. PO)

Cr. GRIR????????????????????????????? XXX

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• 2.????? Dr. CWIP Ledger ????????????? XXX??????? (Capital Work in Progress)

Cr. AUC?????????????????????????????? XXX

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• 3.????? Dr. Assets Ledger???????????????????????????? XXX (Assets capitalized after PUT TO USE)

Cr. WIP Ledger???????????????????????????????? XXX

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• 4.????? Dr. Depreciation Exp ????? XXX??????? ?????????????? (When Depreciation run is executed)

Cr. Accumulated Depreciation ??? XXX (Contra Asset Account)

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When Life is over, or company decided to write off due to whatever reason before useful life.

?????????????? Accounting entry for sale with a customer:        

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• 5.????? Dr. Customer Ledger?????????????????????? ?????????????? ?????????????? XXX

Dr. Accumulated Depreciation????? ?????????????? ?????????????? XXX

Dr. Loss on sale of Assets????????????? (if Applicable)??? XXX

????????????????????????????? Cr. Profit on sale of Assets (if Applicable)??????????????? XXX

????????????????????????????? Cr. Assets Ledger (B/S)???????????????????????????????????????????????? XXX

????????????????????????????? Cr. Sale of Assets (Revenue)???????????????????????? ?????????????? XXX

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Accounting entry for sale without a customer:        

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• 6.????? Dr. Accumulated Depreciation????? ?????????????? ?????????????? XXX

Dr. Loss on sale of Assets????????????? (if Applicable)???? XXX

????????????????????????????? Cr. Profit on sale of Assets (if Applicable)??????????????? XXX

????????????????????????????? Cr. Assets Ledger (B/S)???????????????????????????????????????????????? XXX

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