Depreciation
Why include depreciation?
Depreciation is regarded as a fixed cost. Unlike other fixed costs there is no cash flow for depreciation. So why include it when calculating profit? At some point assets will wear out and need to be replaced. Including depreciation ensures that profit is sufficient to cover their eventual replacement.
Users have two options on how to include Depreciation:
Option 1
Enter the depreciation rate (e.g. 10%) then enter the total value of all depreciating assets into the Assets page by (a) clicking ‘Add Asset’ and (b) selecting ‘Plant and Machinery’ then (c) entering a name and the total value of all depreciating assets (e.g. $350,000).
Option 2
Complete the Depreciation Schedule with information about every tractor, implement and other types of depreciating assets (e.g. vehicles, pumps and equipment) by pressing "Add Depreciating Item":
- Enter the name of the depreciating asset (e.g. John Deere 7830 Tractor);
- Enter the value at beginning of year (e.g. $100,000);
- Number of years of use remaining (e.g. 10 years);
- Residual salvage value (e.g. $30,000), which is an estimate of how much the depreciating asset could be sold for at the end of the ‘Number of years of use remaining’.
Users can only choose one of the above-mentioned options otherwise depreciation costs will be included twice – and therefore double counted.
Option 2 Calculation
Annual depreciation is calculated in FEAT according to the formula:
Annual depreciation = (Value at beginning of year – Residual salvage value)/(Number of years of use remaining)
Value at end of year = value at beginning of year – annual depreciation
The average of the opening value of all items (a) and the closing value (b) is transferred to the Asset page and displayed in the assets table.
