Double-Declining Balance Depreciation Discussion Paper
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Double-Declining Balance Depreciation Discussion Paper
Figure 3-21: Double-declining balance depreciation
1,080–80
Figure 3-21 illustrates the double-declining balance method for the same asset. The depreciation rate is equal to double the depreciation rate for the straight-line method. The annual depreciation in the straight-line method
is $1,000. Therefore the depreciation rate is $1,000 divided by $5,000, which is 20%. In the double-declining balance method this rate is doubled to 40%. By comparing Figure 3-21 with Figure 3-20, you can see that the
double-declining balance method is an accelerated depreciation method that allows the com- pany to expense the asset at a faster rate than the straight-line method. Note that the book value cannot be less than the
residual value. Consequently, the depreciation in the fourth year is a fi xed amount ($80) needed to bring the book value to the residual value of $1,000.
A company selects a depreciation method based on a variety of factors including generally accepted accounting principles, tax laws, and regulatory requirements, to name a few. Consequently, an asset can be valued differ-
ently for different purposes. For example, the same asset can be depreciated using one method to satisfy legal and regulatory requirements but a differ- ent method to address management’s needs. Referring back to the
computer purchase, for internal purposes the computer can be depreciated over two years using the double-declining balance method. However, tax laws may require that it be depreciated over fi ve years using the straight
line method. Thus, an asset can be depreciated using different methods and assumptions
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Processes 71
simultaneously. This practice is called parallel depreciation or parallel valu- ation of assets, and it is used to support the practice of parallel accounting discussed earlier in this chapter.
These different calculations are maintained in different depreciation areas. Common depreciation areas vary across countries. In the United States, the common areas are book depreciation, cost accounting deprecia- tion, and tax or legal depreciation. Book depreciation is used to prepare fi nan- cial statements for shareholders and to meet regulatory requirements. Cost accounting depreciation is used to allocate the cost of using the asset
to a cost center. For example, the depreciation associated with a machine used in a production facility is allocated to the production cost center. Tax deprecia- tion is used to fi le federal and state income tax returns.
Demo 3.9: Depreciate an asset
Retirement
After an asset has completed its useful life, it is disposed of, or retired. Asset retirement may or may not generate revenue. If an asset does not generate rev- enue, then it is scrapped. An asset can be sold to an external
entity. The com- pany may choose to utilize a fulfi llment process similar to the one described in Chapter 5 to dispose its assets.
INTEGRATION WITH OTHER PROCESSES
Because fi nancial accounting is concerned with recording the fi nancial conse- quences of process execution, it is tightly integrated with all of the processes in an organization, as illustrated in Figure 3-22. Numerous steps
in the different
Figure 3-22: Integration of fi nancial accounting with other processes
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72 CHAPTER 3 Introduction to Accounting
processes have a fi nancial impact on the fi rm. The key to recognizing these inte- gration points is to “follow the money.” Any time money either leaves or comes into the company—or the company makes an obligation to
pay or receive money—there is very likely a fi nancial accounting impact. We have illustrated this point in our examples of fi nancial accounting transactions throughout this chapter. As we discuss the various processes in
later chapters, the linkages between fi nancial accounting and these processes will become clearer.
REPORTING Reporting in fi nancial accounting is broadly divided into two categories: dis- playing account information and generating fi nancial statements.
ACCOUNT INFORMATION
Account information can be obtained at three levels—account balance dis- play, line items display, and original FI document. Figure 3-23 shows the bal- ance display for a bank account for the months of September (Period
9) and October (Period 10). The fi gure highlights a drilldown for a credit amount of $19,000 in September. The drilldown reveals a list of line items that comprise the credit amount. One of these items is for the value of
$5,000. A further drill- down of the $5,000 displays the data in the original FI document—the original debits and credits—associated with the posting. Note that drilling down to the line item level is possible only if the line
item display indicator, which was dis- cussed earlier, is set in the general ledger account master data.
Figure 3-23: Account information. Copyright SAP AG 2011
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Reporting 73
Demo 3.10: Review account information
ASSET EXPLORER
The data associated with assets is complex and includes information concern- ing acquisition, depreciation, and retirement. The simple reporting capabili- ties discussed in the previous section are not adequate for asset accounting. Consequently, companies rely on a reporting tool known as the asset explorer (Figure 3-24). The asset explorer provides an overview of all the activities related to the asset, including acquisition data, planned
and posted deprecia- tion for different depreciation areas, and comparisons of data across multiple years. It also enables companies to drill down for details regarding master data, transactions, and documents.
The asset explorer distinguishes between planned values—depreciation amounts that have not yet been posted to the general ledger accounts—and
Figure 3-24: Asset explorer. Copyright SAP AG 2011
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74 CHAPTER 3 Introduction to Accounting
posted values, which have been posted. Planned values must be periodically posted to the general ledger. Companies accomplish this task by executing a depreciation posting run, which posts the planned values for the
specifi ed time period for all depreciation areas to the appropriate general ledger accounts. In addition, it charges the appropriate cost centers with the depreciation expenses incurred.
Figure 3-24 is an example of the asset explorer. The top part of the fi g- ure identifi es the asset and the fi scal year for which the data are displayed (asset #100002, offi ce furniture, and 2010, respectively). The top left part
lists available depreciation areas. In the fi gure, two areas are available: book depre- ciation and tax depreciation. Book depreciation has been selected. The tabs in the middle part of the fi gure indicate the types of data that
are maintained in the asset explorer. Note that the posted values tab is selected. This tab displays the acquisition value of the asset and depreciation values that were posted by the depreciation run. The planned values tab
includes planned depreciation values for all the depreciation areas. The comparisons tab dis- plays data for multiple years, and the parameters tab displays current settings for the parameters associated with the asset,
such as the useful life and the depreciation method.
Demo 3.11: Review asset explorer
FINANCIAL STATEMENTS
Recall that the primary goal of fi nancial accounting is to report data needed to meet legal and regulatory requirements. This reporting takes the form of fi nancial statements, including the balance sheet and the profi t and loss state- ment. The specifi c accounts that need to be included in these statements are determined by the nature and purpose of the requirements.
Financial statements can be generated for different organizational levels, including one or more company codes and business areas. Financial statements are created from fi nancial statement versions. A financial state-
ment version is a hierarchical grouping of general ledger accounts that must be included in the fi nancial statements. A company can defi ne multiple fi nancial statement versions, tailoring each one to satisfy different
reporting requirements. Financial statements can be generated from either the opera- tive chart of accounts or the country-specifi c chart of accounts. These state- ments also specify additional characteristics such as
currency, format, and level of detail.
Figure 3-25 provides an example of a balance sheet. It is defi ned using a fi nancial statement version that includes relevant balance sheet accounts. It is grouped into two major categories, assets and liabilities/equity, which in turn are divided into account groups such as short-term assets (e.g., raw materials and fi nished goods) and long-term assets (e.g., land and depreciation).
Figure 3-26 displays a profi t and lost statement. It is grouped into rev- enue accounts, expense accounts, and cost of goods sold accounts.
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Reporting 75
Figure 3-25: Financial statement version with balance sheet accounts. Copyright SAP AG 2011
Figure 3-26: Financial statement version—with profi t and loss accounts. Copyright SAP AG 2011
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76 CHAPTER 3 Introduction to Accounting
Demo 3.12: Generate fi nancial statements
Recall from our discussion of asset accounting earlier in this chapter that in fi nancial accounting an enterprise maintains a variety of deprecia- tion areas simultaneously. As a consequence, the enterprise requires different
types of fi nancial statements—for example, one type for external reporting and another type for fi ling taxes. For this reason it maintains different fi nan- cial statement versions, each of which includes the appropriate
depreciation- related accounts. Figure 3-27 shows a company that uses two depreciation areas to provide data to different fi nancial statements intended for different audiences. Specifi cally, the company includes book
depreciation data in the fi nancial statements presented to shareholders and tax depreciation data in the statements intended for tax authorities.
Figure 3-27: Financial statements based on depreciation areas
C H A P T E R S U M M A R Y
In this chapter, we explored various ways in which a fi rm can use accounting processes to refl ect the impact of the other business processes (e.g., procure- ment and fulfi llment) on its fi nancial status. We also considered how the fi rm can utilize accounting information to better plan and manage its operations.
The two basic categories of accounting processes are fi nancial account- ing (FI) and management accounting. Financial accounting is concerned with calculating the impacts of business operations for external reporting, typically to regulatory bodies and shareholders. In contrast, management accounting, or controlling (CO), consolidates process data the fi rm utilizes for internal manage- ment and planning. Both fi nancial and management accounting leverage the same data from an ERP system, but they do so from different perspectives and for different goals.
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Review Questions 77
Financial accounting consists of fi ve key processes: general ledger accounting, accounts receivable accounting, accounts payable accounting, asset accounting, and bank ledger accounting. These processes are closely linked with other operational or logistics processes throughout the fi rm, and they share a great deal of the common master data found in those processes. Financial accounting uses several unique types of data, such as the chart of accounts, general ledger accounts, subsidiary ledgers, and reconciliation accounts, to provide a complete picture of the fi rm’s fi nancial status.
Management accounting focuses primarily on the allocation of costs and revenues to proper areas within the fi rm. Costs and revenues that are incurred as the various business processes are executed are accumulated in various cost objects. Firms then utilize these data to manage the organization.
K E Y T E R M S
Account determination
Account group
Accounts payable accounting
Accounts receivables accounting
Asset accounting
Asset class
Asset explorer
Assets
Balance sheet
Bank ledger accounting
Business areas
Chart of accounts (COA)
Cost center
Cost objects
Depreciation
Depreciation areas
Equity
Expenses
Financial accounting document
Financial statement version
General ledger (GL)
Income statement
Liabilities
Parallel accounting
Profi t and loss statement
Reconciliation accounts
Revenues
Segment
Statement of cash fl ow
Subledgers
Subsidiary ledgers
Double-Declining Balance Depreciation Discussion Paper
RUBRIC
Excellent Quality
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The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Literature Support
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The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Methodology
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Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score
50-85%
40-38 points
More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.
83-76 points
Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.
52-49 points
Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality
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37-1 points
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75-1 points
Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.
48-1 points
There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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