How to Forecast Depreciation

Written by Ross MacLeod

Depreciation is a process via which the decline in value or the costs of tangible assets are allocated over the useful lifetime of the asset. When accounting for depreciation, the monthly depreciation expense of the asset is first calculated and then entered on both the Profit & Loss and Balance Sheet until the value of the asset either falls to zero or the asset itself is sold.

Example using the Straight-line Method

The Straight-line method is the most common method of calculating depreciation. Under the Straight-line method, depreciation of the asset is recorded evenly across it’s useful life, with depreciation expense calculated as:

(Cost of asset – Residual Value of Asset) / Estimated useful life of Asset

If we were to purchase an asset for £10,000, with a residual value of £500 and that asset had a useful lifetime of 4 years, then using the Straight-line method we would calculate our monthly depreciation expense as follows:

(£10,000 – £500) / 4
£9,500 / 4
£2375 per annum

£2375 /12

When accounting for first taking on the asset we would make the following Journal entry:

Credit Bank Accounts £10,000

Debit Fixed Assets £10,000

Depreciation of the value of the asset would then be recognised monthly as:

Debit Depreciation Expense £197.92

Credit Accumulated Depreciation £197.92

Representing this in FUTRLI

In FUTRLI, the above entries would be recorded by creating two forecast items, one against the appropriate Fixed Asset line and one against the appropriate Depreciation Expense line on the Profit & Loss. In the below example, we’re going to enter the purchase of the asset against our Plant & Machinery line using the Single/Repeating entry method:

Here we are forecasting the purchase of a new asset valued at £10,000

This will debit our chosen Fixed Asset’s line by £10,000, and our VAT line by the Sales Tax amount, and credit our Bank Accounts by £10,000 + the VAT amount (if applicable).

We now need to enter a second forecast item to account for monthly Depreciation. We would do this using the Single/repeating entry method on the appropriate Depreciation Expense line:

After entering our Depreciation Expense forecast, we need to select Advanced options

As Depreciation does not impact the Bank Account, we need to use FUTRLI’ Advanced Options to enter this as a No Cash transaction.  *Please note* No Cash is not selectable unless GST/VAT and Credit Terms have both been set to 0. To do this, we need to select Advanced options at the bottom of the window and then ‘No cash’ from the first dropdown menu. As we also need to account for accumulated depreciation on the Balance Sheet, we would now select the appropriate Accumulated Depreciation line from the third dropdown menu.

This allows us to override the default behaviours and enter this as a No Cash transaction