Back to basics: how to account for depreciation

Tips from John O'Brien, chair of the Community Accounting Network

There are two basic types of account: simple cash-based accounts and more complex accrual, or income and expenditure, accounts. Larger charities and all companies must prepare accrual accounts. Depreciation is used only in accruals accounting.

Let's assume you bought a minibus for £20,000 at the start of the past accounting year. With cash accounts, all you are showing is what payments were made - that in this period, you spent £20,000 on a vehicle. This will be listed later on as one of your assets.

With accruals accounts, you are showing what it cost you to run your organisation in that period. A fixed asset is a big thing that lasts a long time. It's usual to assume that all assets of the same type will last the same amount of time. We'll assume, for example, that all vehicles, including our minibus, will last four years. So in the last accounting year, you could say you used up a quarter of the minibus - £5,000. That is the depreciation figure in your accounts.

At the end of our year, the asset has depreciated by a quarter, but we've still got three-quarters left to use in the future. This is £15,000 and is the figure for 'fixed assets' that appears in the balance sheet. After four years, the asset is fully depreciated - we've used it up and the net book value is nil.

Of course, life isn't that neat, and you might still be using the van after five years, or sell it for £3,000.

Finance Advice

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