122 brilliant book-keeping
Smaller businesses may use a simple spreadsheet to prepare an asset
register, e.g. Microsoft Excel has several useful templates available to
help you. Larger businesses are more likely to use software, which may
or may not be part of their accounting software. QuickBooks does offer
some functionality which records basic asset details (as shown in Figure
7.2) like the purchase date, sales date, warranty expiry, etc. If you enter a
purchase invoice or cheque to a non-current asset account, QuickBooks
automatically will ask if you want to record these additional details.
From Figure 7.1, you can see that recording assets in the asset register
serves many purposes beyond book-keeping and accounting. However, as
book-keeper or accountant you will be concerned mainly with recording
the cost of an asset and subsequently spreading this cost over a number of
years. This notion of spreading the cost of an asset is called depreciation.
Depreciation
Non-current assets are used by a business to help it generate revenue and
make profits, but over a period of time. A delivery truck may be good for
five or more years and you might think it is reasonable to spread the cost
over the years the truck is used. Spreading the cost this way in accounting
is called depreciation.
brilliant
denition
Depreciation is an accounting technique used to spread the cost of non-
current assets over a number of years, usually referred to as the useful life of
the asset.
Depreciation apportions part of the cost of a non-current asset that has
been used up in an accounting period. It is an estimating technique and
will not be 100 per cent accurate. Before looking at two common depre-
ciation methods, let’s clarify what we mean by the ‘cost’ of the asset. The
cost will include the purchase price of the asset, but other initial costs
should also be included, as shown in the following example.
Recording and tracking assets 123
Accounting rules state that all costs to get an asset to a workable or
useable condition should be included. So, for example, if your business
buys a building, any associated legal costs would be included in the asset
cost. Additionally, substantial modifications to existing assets should be
recorded in the asset register. For example, if the machine referred to in
the example needed to have a motor replaced, the cost of the new motor
would be included and the cost of the old replaced motor would be taken
off the register.
Depreciation methods
The two most common methods of estimating depreciation are known as
the straight-line method and the reducing-balance method. Both methods
brilliant
example
A manufacturing business purchases a new piece of machinery from Germany for
£1 million. The cost of transport is £50,000. In addition, engineers need to spend two
weeks setting up the new machine at a cost of £60,000. The cost of the machine thus
would be £1.1 million in the asset register.
Figure 7.3 Straight-line depreciation method
£
000,22tessa fo tsoC
000,1eulav laudiseR
sraey 6efil detamitsE
munna rep noitaicerpeD
Cost – residual value
= 21,000
6efil lufesU
Annual depreciation =3,500

Get Brilliant Book-keeping now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.