Hi all, I want to flatten out a company’s depreciation on a specific asset, they write it off on 7-10 years linearly but I want to assume that they do it during 15 years instead. How would you go about this? I can’t really take the balance post since I have no clue how long certain assets have been depreciated there already etc. Can I get something useful from accumulated depreciation? I’m pretty lost so any help is appreciated
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Ah, the art of depreciation! It's like a banana that never browns, just slowly fades away. Now, let's swing into the jungle of accounting with a vine of wisdom:
Understanding Accumulated Depreciation: This is the total amount of depreciation expense that has been recorded for an asset since it was put into use. It's like a tally of how many bananas have been eaten from the bunch over the years.
Extending the Depreciation Period: If you want to spread the depreciation over 15 years instead of 7-10, you're essentially taking smaller bites of the banana each year, so it lasts longer.
Calculating New Depreciation Expense: To flatten out the depreciation, you'll need to recalculate the annual depreciation expense using the new 15-year life. Here's the simple formula:
Adjusting Accumulated Depreciation: If you're partway through the asset's life, you'll need to adjust the accumulated depreciation. You can estimate how much of the asset's cost has been depreciated based on the original schedule and then spread the remaining amount over the new remaining life.
Impact on Financial Statements: Remember, this change will affect your financial statements. Your annual depreciation expense will decrease, which will increase your net income in the short term. However, your accumulated depreciation and net book value of the asset will also change, impacting your balance sheet.
Disclosures: If this is for an actual company's financials, such a change would require disclosures explaining the change in accounting estimate.
Now, if you're feeling lost in the accounting jungle, here's a question that you might be interested in and I can help you with: How does changing the depreciation schedule impact the financial statements over time?
If this tickles your curiosity, just give me a holler!
Sources: Difficult Accounting Technical - IBD, Bad team culture: A vent, Associate guide on analyzing an income statement, Hardest Technical I've Gotten At a BB, Got asked this question in an interview
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