Asset Accounting 5

So under depreciation, we have multilevel method. So yesterday, we have created multilevel method key, multilevel method means nothing but, that’s what we have discussed. At different levels, we can have different depreciation percentages also. We can have separate percentages. So in the multilevel method, our chart of depreciation is DRCD, Doctor Reddy Lab’s chart of depreciation. And here, we have created 4 depreciation keys. 

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This is DR1, DR2, DR3, DR4. And, all are straight line method, one only I have for non heavy plant and machinery, I have taken WDV method, that is return down value method. So we have discussed about what are the difference between straight line method and the return down value method. So let us see even in case of calculation of depreciation, how system calculates WDV method and how system calculates straight line method. And, constantly, there is one interview question always in this area: how system calculates straight line method or WDV method. So for that, our question is that, say, in case of straight line method, in the multilevel method key, in the levels, what we have done here? See base value.

For straight line method, we choose base value. Base value 01 means acquisition value. So here we are telling to the system, I’m going to calculate 10% depreciation on acquisition value. So what is acquisition value? Here in this example, we have already seen this is acquisition value, say, 1 lakh is the asset acquisition value. System always, every year, calculate depreciation on acquisition value. System go to the original value of the asset then calculate depreciation. So if you choose this, then system always calculates depreciation on straight line method because it is going to take the original acquisition value of the asset. But whereas in the case of WDV method, see see here. 12% WDV method. DR3, here go to ‘Level’. Here, I have taken 24.

24 is nothing but return down value method, so net book value. System calculates depreciation on the net book value. That is whatever the value that is available in the beginning of the year, that is original value minus depreciation. That is the return down value. Again, every year, system calculates depreciation on return down value method only. So this is always a difficult question. So many people, they failed to answer this question. How system identifies whether it is a straight line method or a WDV method. What is the parameter or where the consolidation is being done for this? Means, this is the multilevel method key. We do take 24 for WDV method because it calculates the depreciation on return down value method, that is net book value. Net book value nothing but here. 

See, in case of straight line method, 1 lakh minus 10,000 depreciation, 10,000. Here, every year calculates for example, if we have calculated the depreciation, acquired asset in 2012. First year 10,000, again 10,000, again 10,000. Because 10% is calculated on the original value. But whereas in case of WDV method, it calculates first year 10,000, balance is 90,000. Then next year, 10% on 90,000, 9000. Then next year, 90,000 minus 9,000, 81,000, so on 81,000 10%, 8,100. Like that, return down value. So this is called net book value. Net book value means the value net of depreciation. So this is acquisition value versus value. So in case of WDV method, if you take 24, system calculates the depreciation of the net book value. Hence, system calculates WDV method here. So this is the answer.

So multilevel method we have defined yesterday. Now the next one is in order to calculate depreciation, we need 2 keys. One is multilevel method key, another one is main depreciation key. So now we are going to define the main depreciation key. In the main depreciation key, whatever the 4 keys that we have defined in the multilevel method, all those things we have to insert. How we have to insert that, I’ll show you. Right now, maintain depreciation key. Go here the same.

The path is Financial Accounting, Asset Accounting, Depreciation, Valuation Methods, Depreciation Key, Calculation Methods, and Maintain Depreciation Key. And here in the calculation method we have, Define Base Method, Define Declining Balance Method, Define Maximum Amount Method, Define Multilevel Method, Define Period Control Method. There are 4 things out there. Out of this, we are going to use base method and the multilevel method, and period control method. These 3 methods we’ll use here in this depreciation key. These are all standard that we need not configure these things. We have to take it. I’ll show you why we have to take, what we have to take I’ll tell you. So if you go to the maintain depreciation key, here we are going to define our own. Standard Depreciation Keys are available here, but we are not going to use this because we don’t know how these depreciation keys have been prepared. And if we create our own depreciation key, we can understand how to create a depreciation key. Better to go for new entries. Then I am creating a depreciation key DR01, the first key. Here we’ll create DR01, DR02, DR03, DR04. Four depreciation keys we can prepare. I’m going to use the same narration. 

Here, 5% straight line depreciation on admin building. Now let us see here. 

Here, period control according to the fiscal year. So as per the number of periods will be controlled according to the fiscal year, that is as per the number of periods that you have in a fiscal year, system calculates depreciation accordingly. Depreciation to be calculated to the date, up to the date whether per procurement or sale should be calculated, these two, you check it. And here it is in inactive mode. Once we create all the depreciation keys, we have to activate it. By standard, it will be in inactive mode. Assignment of calculation methods. So this is the key depreciation key. This has to be linked to the asset. Every asset should be assigned. One depreciation key, this is the key we have to assign. And this is the state line depreciation on admin buildings. So in asset class, we have admin building, factory building. Anyway, no depreciation on land. Similarly, heavy plant and machinery, non heavy plant and machinery. Like that any number of assets we have, we should have that many number of depreciation keys. Now once you take down this, double click on assignment of calculation methods. So calculation methods need to be assigned here. Go to new entries. Here, type of depreciation, we have ordinary depreciation, special tax depreciation, interest. So ordinary depreciation, as per the Company’s Act.  Phase, from the start of the depreciation, changeover with planned life, changeover after the end of the useful life. This is from the start of the depreciation, we are going to calculate this ordinary depreciation. From the start of the depreciation means from the start of procurement of the asset, I want the depreciation to be calculated. Then assignment of calculation methods. So here, to the depreciation key, we have to assign calculation method. I told you there base method, declining balance method, product period control method, multilevel method key, so multilevel method. Now multilevel method, anyhow we have defined our own key. I’m going to assign the same DR01. It’s 5% straight line depreciation on admin buildings. 

Then what is this base method? Base method is nothing but here, there are, 0012 – ordinary explicit percentage, 0014 – ordinary explicit percentage (after end of the life). Here, sometimes what happen, asset will be there, every asset must and should be associated with with one depreciation key. Depreciation key, it maintains so many parameters with reference to each and every asset master record. Now if we take 12, system thinks that we need only depreciation key to be assigned, explicit percentage, here as per the explicit percentage only, we are going to calculate, but system will not take care of the asset after the end of the useful life. Means, say for example, we have purchased an asset with 1 crore and depreciation has been completed say within maybe 7 or 8 years, but the life of the asset is still, we have say 10 years. Then even after completion of the depreciation, the life of the asset is going to be for 10 years because after 7 or 8 years, depreciation has been completely exhausted. If in case of, say, pollution control equipment or some of the heavy plant and machinery, maybe that rate of depreciation will be very high. Say, for example, if you take 20% of depreciation, within 5 years, entire value will get depreciated. Now the life of the asset maybe 10 years. But in some of the cases, what we need to do, total value of the asset divided by number of years of useful life of the asset will give you the percentage of depreciation. Into that we can calculate the percentage. So the total value of the asset divided by number of years, they can give you the amount. That amount, we can take it into percentage, and that will be the percentage. But now here, as per the complete set, we need to take the percentage. So that’s why here explicit percentage we are going to take. If you take 12, system will not take care of the asset after the end of the completion of the depreciation. And not only that, after the useful life of the asset, say I say useful life of the asset is 10 years. After 10 years, that asset will not disappear just like that, system will be there. But what we thought is that useful life is 10 years. Maybe even after useful life, maybe that asset will work maybe for 1 year, 2 year, 3 year until it is going to be scrapped completely I can use the asset with repairs, etc. But in case if you decide, if you take depreciation key 12, ordinary explicit percentage only it will take. But if you take 14, ordinary explicit percentage even after the end of the useful life. It it will give you message even. If I take 12, I’ll show you once. If you save system, it’ll give you a message. I’ll show you that. Generally, we have to take 14 not 12, we’ll change it again.

Next one is period control method. So regarding the period control method, we have 01/01/02/02. What is this? This I’ll tell you once we complete the depreciation key. When we go out, I’ll show you how that method will work. See. Now DR01 is the depreciation key. To this we have assigned under the explicit percentage, period control method, multilevel method which we have created yesterday. Save it.

DR01, check the treatment after the end of the user life. So system will not maintain the asset value after the end of the user life if you take 12. With system, the deprecating key will not function, so that’s why what I need to do is take 14- ordinary explicit percentage depreciation, take care of the asset even after the end of the useful life. Though I said 10 years, system will work for 15 years then depreciation key will take care of the asset for any number of years. Otherwise, we need to change the depreciation key subsequently. This is the way we create the main depreciation key. The t code is AFAMA. Now let us go to the next.  Here, second key, DR02. 10% straight line depreciation on factory building DRLB. Same way. Double click on assignment of calculation methods. Go to new entries. Take ordinary depreciation, take from the start of the depreciation, take 0014 as base method, period control method, 001, and choose the multilevel method which we have created  DR2, 10% straight line depreciation on factory building.

Then go back. Next entry. Next is DR3. But this I’m telling you how to calculate WDV method. How system shows you? I’ll show you that. Because when you calculate the WDV method, the value will not get 0. It will take so many years in order to complete this one. Here the value will be minimum but it will not become 0 for so many years. But in this case very sharp, within 10 years, will become 0. The value of the asset in the books of accounts. So 12% WDV depreciation. Same thing. Take assignment of calculation methods, New entries, fill ordinary depreciation, from start of the depreciation, everything’s the same. Here, multilevel method Dr3 12% WDV depreciation. 

Save it. Then come back. Next entry, DR 4.20% straight line depreciation on heavy plant and machinery. Since this is a heavy plant and machinery, the rate of depreciation will be generally more. In case of India, these depreciation rates are decided by not the company as per the Companies Act. Here, same entries, go to Assignment of calculation methods, New entries, base method 14, multilevel method DR04 20% straight in check here 2020.

So now we have created 4 depreciation keys. 

These are the 4, DR01, 2, 3, 4 and all are inactive status. If it is in inactive mode, system will not calculate any depreciation. It has to be activated. Select the depreciation keys. Click on activate. Now it is in active mode. 

See? It’ll become active. Once the depreciation key is active, then only it will function. So whenever you want, you can activate or deactivate. So this is the creation of depreciation key we have done. This is the maintain period control method.

This is what we have assigned in this key. Period control method is nothing but it will control the period. We have assigned 001. What is 001? 001 is nothing but 01/01/02/02. Then what are these columns here? Acquisition, addition, retirement, transfer. In these circumstances, that is when we acquire the asset, when we make the addition of the asset, when we retire the asset, when we transfer the asset, what are the norms for capturing of the depreciation? What is the day we should take? That is what system tells us. Here, the rule is that at 01, pro rata at the period start date, acquisition. So whenever we are going to acquire an asset, system calculates pro rata depreciation from the start of the procurement date, pro rata at period start date. Then 02 is nothing but pro rata up to the mid period and the period start date. So this is for retirement or transfer. So whenever you are going to retire the asset or sell the asset up to the mid period, even then, it’ll calculate the pro rata depreciation. So, yeah, there are so many options given. What options we want, that we need to select from here. Accordingly, system calculate the depreciation. But the standard methods are already defined here. 1, 2, 3, 4, 5. Here, different combinations are there, so we can take any combination from which period to which period you want the depreciation. But, generally, this is the method we take, 01 pro rata period for the acquisition or addition. For 02, additional, retirement or transfer. So system calculate depreciation accordingly. This is standard. We need not do anything. Just try to understand, that’s all. And now depreciation is complete now. So we have created multilevel method key and we have created main depreciation key. And, after creation of the multilevel depreciation key that is assigned or linked in the main depreciation key, our multilevel method key is nothing but wherein it will identify whether you are going to calculate straight line method or WDV method. And, actually, the percentage and how many years this depreciation key is going to function. All those things we have defined in the multilevel method key, and that key we have assigned in the main depreciation key. 

Now the last and final configuration. So in asset accounting, the number of configuration steps are more and a bit confusing. But unless you do it around four or five times, you cannot remember all these things. So the main difficulty part in asset accounting is the main configuration. Next is Valuation, Determine Depreciation Areas in the Asset Class.

Now here, we have seen asset class. Now the depreciation key, whatever we have defined, that is going to be linked up at asset class level. If I’m going to assign a class level, see, my account determination is building, building is classified into admin building, factory building, guest house. For each thing, I have a different percentage. So at this level, I need to assign depreciation key. If I’m going to assign depreciation key at this level, for all the assets, whatever I acquire for that depreciation, the same depreciation key will function. Because admin building is all our admin and this set of buildings. What are the percentage that is applicable to all those assets. That’s why we are going to link up the depreciation key at the asset class level. Similarly, factory building. So all factory building, same percentage I use. That’s where at class level, I can define. So that what happens, you know, when asset master is created, system by default takes the depreciation percentage whatever we have given the asset class. That is required. So that is a suggestive way for the user because user may or may not know what is the depreciation, percentage that he has to take. But by default, system chooses the percentage, the same percentage or the same key, whatever we have assigned in the asset class. That is what we are going to do now. That means we are not giving the chance to the user because at high level, we define whatever the depreciation percentage we have to use, all those things at high level as per the company’s act or income tax, whatever it may be. And now here, determine depreciation areas in the asset class. So in the asset class, I need to assign. Here, the asset classes, whatever we have defined are visible here.

Now I need to assign the depreciation key here, say, administrative building. Select administrative building, double click on depreciation areas. 

Now it is in the deactivation mode. You have to remove the checkmark to activate. And what I need to do? Here is the layout. What is this layout? 

Here it says that 1,000 depreciation on main asset number level. 2,000 depreciation on sub asset number level. Here, if you have a sub asset I told you about sub asset. Sub asset also takes the same depreciation as that of the main asset. So in case if you are assigning the depreciation key to an asset which does not have a sub asset, then we have to assign 1,000. Means asset depreciation is calculated at main asset number level only. But if there is an asset, say, heavy plant and machinery is there. For that, we have a sub asset. In such case, we have to assign 2,000, that is we are telling to the system you calculate depreciation on a sub asset level also. Same depreciation key has to be applicable for the sub asset too. But if you take 1,000 for admin building, I’d not have any in the subset. Press enter. Once you press enter, then only depreciation key will open, until then, it will not open up. For administrative building, what is the depreciation key? DR01. 5% straight line depreciation on administrative buildings. Assign this depreciation here. Here use means useful life. Per means period. So how many years? Ten years, six months. I can do like that. 

But admin building, maybe for all admin buildings may or may not have the same number of years of service. So that’s why better not to give it. In case if management wants to give, we can give. But otherwise, whenever we create an asset master, in the asset master itself, we enter the total useful life. So that’s why I’m not entering here. First item is book depreciation as per the companies act. Second is tax depreciation as per the income tax act. Same depreciation key is going to be copied, and if you want you can change it. This is now complete. So at this asset class level we are assigning the depreciation keys. Come back. For asset under construction and land, there is no depreciation at all. But even though there’s no depreciation, we need to assign 0 depreciation key. But we have not defined 0 depreciation key. But standard depreciation key is available. So we can assign, anyway what zero means I’ll show you. In asset under construction, take layout 1,000. Press enter. Take here the standard depreciation key 0 – No depreciation and no interest, take it. That’s all. All zeros will be there.

Next. Number three, Factory building. Select it. Double click on depreciation areas. Remove checkmark. So factory building may have a subset. Say factory building associated factory shed will be there. In case if you have a sub asset, I have to take 2,000- depreciation on sub asset number level. So, sub asset, the same depreciation will be taken. Press enter. Let us take the depreciation key, DR0 to say 10% depreciation on factory building. Here, useful life, I’m not taking anything. At the time of creation of asset master record, I’ll do that. Next, Freehold land. So on land, we do not have any depreciation, so 0 deprecation key. Come back. Then heavy plant and machinery. So sub asset will be there. That’s why I’m taking 2,000, depreciation on sub asset number level. Here, straight line depreciation on heavy plant and machinery DR04. Next, Leasehold land. So whether leasehold or freehold land, no depreciation, that is 0 depreciation. For Non heavy plant and machinery, no sub asset. DR03 WDV depreciation on non heavy plant and machinery.

Like this, for each and every asset class level, I need to assign the depreciation key. So that has been done. So the total configuration of asset accounting has been done with. Now we need to create asset master record. Just like customer master, vendor master, GL master, asset master. So master record is a permanent record in which the details of all the assets will be available. Let us create asset master record. So master records will be created in easy access.

Go to accounting. Financial Accounting, Fixed Assets, Posting Asset, Create AS01- Asset. So if you are going to buy an asset, if you are going to buy, right outright purchase of an administrative building, you want to buy a building. So in such case, first of all, as soon as asset is procured, before we do the financial transaction, we need to create asset master record. Say for example, here I am going to create say asset class. If you remember I have given some notes. Sub asset master is created with reference to the asset master record. This we will see when we create sub asset master. Asset master record is created with reference to asset class. What is the meaning of this? Now I’m creating asset master record. So while creating asset master, I have to tell to the system in which asset class I’m creating. DRLB. Here, I am going to create administrative building. This is my asset class. DRLB Admin Building, ADBU. Company code. In this company code, in this asset class, I’m going to create an asset master record. Number of similar assets, only one.

Click on master data. So here, description say admin building at MG road, Banglore, and inventory number, I need not give anything here now.