What is Depreciation on Furniture?
Depreciation of furniture in accounting terminology can be defined as the fall or reduction in the value of furniture, i.e., any movable asset used to make any room, office, factory, etc., suitable for desired working conditions due to wear and tear use and bypassing of time. In other words, it can be described as part of furniture cost price, which has been charged as an expense in one accounting period.
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Explanation
- With the passage of time and consumption or use, every asset undergoes a reduction in its value. This depreciation is defined as reducing the asset’s value and simultaneously charging the equivalent amount in the profit and loss statement (P&L) for that period. Every organization needs to purchase different types of furniture to ensure the smooth running of management and operations. Generally, different furniture assets purchased have a different useful life and accordingly help in the generation of future economic benefits for more than one accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more.
- However, there is some furniture that helps in the generation of future economic benefits for no longer than a single accounting period. These types of assetsTypes Of AssetsAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more are entirely written off in P&L statements and do not need depreciation over multiple accounting periods. An organization has to abide by all the applicable laws and regulations.
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For eg:
Source: Depreciation on Furniture (wallstreetmojo.com)
How to Calculate Depreciation on Furniture?
- Depending upon various rules and regulations and prevailing laws, there might be different methods of calculating depreciationCalculating DepreciationThe Depreciation Expense Formula computes how much of the asset's value can be deducted as an expense on the income statement. Formula for Straight-line depreciation method= Cost of an asset - Residual value/useful life of an asset.read more on furniture. However, some common methods of depreciating furniture include the rate method and life method, or sometimes furniture might also be depreciated based on the unit of production or usage.
- In the case of the Rate method, specific rates may be prescribed at which yearly depreciation will be calculated and reduced from the value of the furniture.
- Under the Rate Method also, there are two different methods like a straight-line methodStraight-line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more where the same amount of depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more will be reduced from the total value of furniture each year. The second most commonly used method is the written down value methodWritten Down Value MethodThe Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, resulting in more depreciation expenses recognized in the early years of the asset's life and less depreciation recognized in the later years of the asset's life.read more. Under the Written down value (WDV) method, a percentage is reduced from the written down value of the furniture.
Examples
For better understanding, let us take the help of numerical examples.
Straight Line Method – Example #1
On 01/01/2019Mark Inc. purchased office furniture like tables and chairs worth $10,000. The rate of depreciation is 10% straight-line method. Calculate yearly depreciation to be booked by Mark Inc.
Solution:
- Yearly depreciation to be booked under Statement of Profit & Loss will be ($10,000 x 10%) = $1,000 annum.
Written Down Value Method – Example #2
On 01/01/2019Mark Inc. purchased office furniture like tables and chairs worth $10,000. The rate of depreciation is 10% Written Down Value Method. Calculate yearly depreciation to be booked by Mark Inc on 31/12/2019 and 31/12/2020.
Solution:
The calculation of yearly depreciation under WDVM for 2019 and 2020 is as follows:
As on 31/12/2019:
- 10% of WDV i.e. $10,000 x 10% = $1,000
As on 31/12/2020:
- 10% of WDV i.e. $10,000 – $1,000 (2019 depreciation) = $9,000
- Depreciation as on 31/12/2020 = $9,000 x 10% = $900
Example #3
On 01/01/2018, Henry Trading Inc., a cloth manufacturer, purchased furniture worth $10,000 for office maintenance. The rate of depreciation is 25% D.B. You are required to calculate yearly depreciation and determine the year in which the asset’s value will be Nil or negligible.
Solution:
Depreciation on the furniture will be calculated as follows:
Accordingly, 2032 will be the year furniture value will be NIL or negligible. Sometimes, assets may be sold at the end of their useful life and generate some monetary benefits. Such an amount must be reduced from the asset’s total value before calculating depreciation. For Example, consider a straight-line method of depreciation; Furniture purchased for $11,000 has a useful life of 10 years and can be sold at the end of its useful life for $1,000. Here, for calculating depreciation, we need to determine depreciable value by reducing scrap sale value, i.e., $11,000 – $1,000, which is $10,000, and this amount will be split between 10 years equally. Therefore, annual depreciation will be $1,000 ($10,000 / 10).
Depreciation Rates for Furniture
Different prevailing laws prescribe different rates for furniture depreciation. Generally, under the US Prevailing laws, furniture, fixtures, and related equipment life are assumed to be seven years in case furniture is used in office locations. However, the furniture life is reduced by two years and assumed as five years in case the asset is used in areas other than office premises. Generally, the method of tax depreciation is 200% Declining Balance (D.B.)
How to Depreciate Furniture?
Determining the depreciation method for furniture is an accounting policy that the entire organization must uniformly adopt over different accounting periods. However, the policy may be changed if the situation demands or due to a change in regulations. Calculating depreciation on furniture is the same as calculating depreciation on any other asset like machinery or vehicle. The only difference is the depreciation rate of the asset and the useful lifeUseful LifeUseful life is the estimated time period for which the asset is expected to be functional and can be put to use for the company’s core operations. It serves as an important input for calculating depreciation for assets which affects the profitability and carrying value of the assets.read more of the asset.
Conclusion
Depreciation can be said as the reduction in the value of assets due to continuous wear aDepreciation can be said to reduce the value of assets due to continuous wear and tear use of the asset or bypassing of time. Furniture can be described as any movable asset like a table, chair, etc., used to make any office or other place suitable for working. Per prevailing laws and regulations, different methods may be prescribed for depreciating furniture. Some common methods are the straight-line method of depreciation, the Declining Balance methodDeclining Balance MethodIn declining balance method of depreciation or reducing balance method, assets are depreciated at a higher rate in the initial years than in the subsequent years. A constant depreciation rate is applied to an asset’s book value each year, heading towards accelerated depreciation.read more, and the Production-based method. The amount of depreciation determined will be charged as depreciation in the Statement of Profit & Loss for that period. Also, the same will be reduced from the asset balance.
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