Methods of Depreciation in AX 2012

Methods of Depreciation

The following methods are available for depreciation calculation:

• Straight line service life

• Reducing balance

• Manual

• Factor

• Consumption

• Straight line life remaining

• 200% reducing balance

• 175% reducing balance

• 150% reducing balance

• 125% reducing balance

Reducing Balance Depreciation

There are two additional fields on the Depreciation profiles form for the reducing balance method of depreciation, the Percentage field and the Full depreciation field.

With the reducing balance method, the value in the Percentage field for each depreciation period reduces the depreciable value of the asset. The following example shows the resulting calculations when you use reducing balance.

Fixed Assets - Vehicle

Service Life - 5 years

Depreciation Method - Reducing Balance

Depreciation rate - 25%

Cost of the asset - USD 30,000

Computation of Depreciation

Year 1 

Deprecation - Cost x Rate , 30,000 x 25% = 7,500 

Book Value - Cost - Depreciation , 30,000 - 7,500 = 22,500

Year 2 

Deprecation - Cost x Rate , 22,500 x 25% = 5,625 

Book Value - Cost - Depreciation , 22,500 - 5,625 = 16,875

The computation of the reducing balance will continue to a predefined minimum value that you may define in AX as the minimum book value after which no depreciation will be charged.

The reducing balance method is pretty much similar to how depreciation is normally computed using the reducing balance method manually whilst accounting for fixed assets. However, in addition to the reducing balance method described where the user enters the percentage, there are four reducing balance methods that use predefined percentages:

• 200% reducing balance

• 175% reducing balance

• 150% reducing balance

• 125% reducing balance

Now these additional reducing balance depreciaiton methods tend to confuse normal users as to what is meant by 200% reducing balance. Is it that a rate of 200% will be used to compute depreciation? Now ofcourse, if 200% rate is used to compute depreciation, it will surely result in negative book value. Then what does this 200% reducing balance represent?

Well, it is quite simple. The rates represented in these reducing balance methods, i.e. 200%, 175%, etc are divided by the service life of the fixed assets to compute the rate for computing depreciation. So given the above example scenario, the rates of each reducing balance method would be as follows:

200% reducing balance - 200% / 5 years = 40%

175% reducing balance - 175% / 5 years = 35%

150% reducing balance - 150% / 5 years = 30%

125% reducing balance - 125% / 5 years = 25%

So assuming the client uses a 200% reducing balance method for the computation of deprecation, the depreciation computation would be as follows:

Fixed Assets - Vehicle

Service Life - 5 years

Depreciation Method - 200% Reducing Balance 

Depreciation rate - (200% / 5 years) = 40%

Cost of the asset - USD 30,000

Computation of Depreciation

Year 1 

Deprecation - Cost x Rate , 30,000 x 40% = 12,000 

Book Value - Cost - Depreciation , 30,000 - 12,000 = 18,000

Year 2 

Deprecation - Cost x Rate , 18,000 x 40% = 7,200 

Book Value - Cost - Depreciation , 18,000 - 7,200 = 10,800

The computation of the reducing balance will continue to a predefined minimum value that you may define in AX as the minimum book value after which no depreciation will be charged.

Conclusion

So there you have it folks, the concept behind the four other reducing balance method mentioned other than the normal reducing balance method. Hope you guys find this helpful in removing confusions as to the reducing balance methods in AX 2012