Thanks Robert , thanks a great deal
Regards
VidhyaDhar
On Fri, May 28, 2010 at 4:04 AM, RPAC1864 via sap-acct <
sap-acct@groups.ittoolbox.com> wrote:
> Posted by RPAC1864
> on May 27 at 6:41 PM Vidhya,
> excellent job.
>
>
>
>
> ----- Original Message -----
> From: "VidhyaDhar via sap-acct" <sap-acct@Groups.ITtoolbox.com><http://Groups.ITtoolbox.com%3E>
> To: "RPAC1864" email@removed
> Sent: Thursday, May 27, 2010 5:41:27 AM GMT -05:00 US/Canada Eastern
> Subject: Re: [sap-acct] Declining-balance multiplication factor
>
>
>
> Posted by VidhyaDhar (User-friendly SAP FI Consultant)
> on May 27 at 5:44 AM Mark this reply as helpfulMark as helpful
> Hi Prafful
>
>
> Let us first understand the concept of depreciation.
>
> You must be aware that depreciation is the process of expensing out a fixed
>
> asset ( viz. reduce the value of the asset in the balance sheet and post it
>
> as an irrecoverable loss / expense in the balance sheet) over the estimated
>
> life of such asset.
>
> There are many such methods to expense out an asset.
>
>
> The simplest of them would be the straight line method which distributes
> the
> asset value in a *linear* fashion and equi-distributes the depreciation
> over
> the estimated life of the asset.
>
> Asset Value on procurement : 100 units depreciated as
>
> (straight line method if the life of the asset is 4 years: 25+25+25+25 ) 25
>
> % depreciation for 4 years
>
> (straight line method if the life of the asset is 5 years: 20+20+20+20+20 )
>
> 20 % depreciation for 5 years
>
>
> The other method is declining balance method which depreciates more during
> the initial years of the asset and depreciates less as time progresses. To
> quote an example, don't you try to save more of your earnings while young
> and use such savings during your old age when you have retired from work?
> Likewise, a fixed asset is depreciated more during its early useful and
> functional life so that you have provided for enough when the asset slowly
> starts losing its functionality as time progresses. This method is *non-
> linear*.
>
> Declining balance method depreciates more when the asset is most useful and
>
> fully functional ( viz. during earlier years from the date of acquisition
> ).
> This method can be expressed as a multiple of straight line method. The
> multiple is called a *factor*. Usually the multiple would be 2 or 2.5 or 3
> which means that your depreciation would be 2 to 3 times more under this
> method as compared to the straight line method . This is just to accelerate
>
> the initial depreciation so that you have earmarked a sizable portion of
> your initial profits for smooth replacement of the asset when your asset
> might start losing its sheen in terms of functionality. This is called
> accelerating the depreciation.
>
> Though you can devise your own factors such as 6 and 7 ( in place of 2 or 3
>
> ), you do not do so for the simple reason that excessive depreciation in
> the
> initial periods with an abnormally high factor of 6 or 7 can affect
> consistency of your annual profits in terms of quantum which is not
> appreciated by tax authorities and other stake holders.
>
> Let us imagine that you are depreciating an asset of 100 units ( 5 year
> life
> ) with 6 factor. This would result in a decrease in the profit by 60 units
> in the first year ; the second year's profit would decrease by 24 units (
> 40
> * 10/100 * 6).
>
> The wide margin in the annual profit happening in your organization would
>
> a. distort estimation of tax liability,
>
> b. distort dividend declaration to share holders,
>
> c. affect comparative analysis of profit across years within the
> organization
>
> d. make comparative analyses across company codes difficult
>
>
>
>
> In order to avoid this, you try not to use a factor of more than 3 or so by
>
> which you accelerate your depreciation and yet keep your annual profits
> consistent.
>
> Now, do you understand the logic behind the factor used in declining
> balance
> method?
>
> Regards
>
> VidhyaDhar
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
> On Wed, May 26, 2010 at 4:12 PM, PraffulKansal via sap-acct <
> sap-acct@groups.ittoolbox.com> <http://groups.ittoolbox.com%3E> wrote:
>
> > Posted by PraffulKansal(Mr)
> > on May 26 at 6:48 AM
> > Dear SAP Gurus,
> >
> > I am on the step of Define Declining-Balance Methods - tcode AFAMD.
> >
> > In that a column for defining Declining-balance multiplication factor.
> >
> > I want to understand the logic for defining multiplication factor, we
> have
> > to define numeric values here in this column, but i don't understand on
> > which basis we define values in this column.
> >
> > Would appreciate ur king help to solve my issues.
> >
> > Regards,
> > Thanks & Regards,
> > Prafful Kansal
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