My bookkeeper has made some mistakes with my Fixed Asset depreciation and I need to know how to correct it.
My accounts package is Quickbooks 2002 and there are 3 different types of mistake made.
There was an incorrect amount of depreciation applied. This has therefore affected subsequent years balances.
In another year, there was only that years assets that were purchased that were depreciated. The balance from previous years was not included so they have not been depreciated for that year. (I have my assets in a pool and depreciate the total, normally!)
In one year nothing has been depreciated. But, some depreciated has taken place on years after that year of no depreciation.
Can someone please advise me on how tackle these 3 issues? Or any of them!
What has the effect of the mistakes been? In particular, since for tax purposes you will be claiming Capital Allowances instead of depreciation, there should be no tax consequence of the figures being wrong.
Therefore, the only reason for correcting it is basically your own peace of mind that the figures in the books reflect what you think they ought to.
What I'd do, in that case, is work out by how much the depreciation is off, and then make an adjusting entry, the purpose of which will be to make the Balance Sheet figures what they should be. It will involve adding the same amount to both credit and debit sides of your balance sheet.
In your balance sheet you have an account called "Fixed Assets at cost" (generally full of debits for acquisitions and credits for disposals) and one called something like "Accumulated Depreciation". In the balance sheet these two are usually presented together, so that fixed assets are listed as "Fixed Assets at cost" less "Accum Deprec" equals "Fixed Assets at book value".
At the end of each year, you normally work out "Fixed Assets at Cost" (uptodate value i.e. including current year's acquisitions/disposals) minus last year's Accumulated Depreciation, and of this value you take whatever fixed percentage it is your policy to use. That's this year's depreciation. You debit it to an Expense account "Depreciation" and simultaneously credit it to "Accum Deprec". Then, to balance, you credit it to Depreciation (clearing it to zero) and debit it to Capital. In fact, you could have omitted the Deprec account altogether and debited Capital directly.
You now want to work out off-line what your adjustment should be, and the entry to make is to debit Accum Deprec and credit Capital with that amount.
The other side has to go to the P&L. Quickbooks doesn't have a balance forward or ledger close down proceedure, so posting to brought forward reserves isn't appropriate.
You didn't notice it at the time so is it really worth worrying about?
Ditto.
No depreciation at all that year?
Why not leave the past alone, pick a simple depreciation rule for each category of Fixed Assets such as:
"25%/15% of the Net Book Value"
...and go on from there. How come your accountant didn't spot this? If you don't have an accountant are you sure you aren't confusing Depreciation with Capital Allowances?
I would prepare a spreadsheet showing the correct calculations for cost, accumulated depreciation and profit & loss account depreciation (including balances at the end of each year, additions, disposals and depreciation for each asset).
According to your above explanation you could include the correction to the profit and loss account depreciation and the accumulated depreciation in the earliest set of accounts not submitted to the Inland Revenue, and Companies House if relevant. Hopefully the depreciation charge will not have to be negative!
Updating a detailed spreadsheet every month/year and comparing it to draft accounts is quite easy to do and avoids problems like this.
You make a good point about confusing depreciation and capital allowances. I have tried to make them the same so that it simplifies things for tax purposes. This is why I need to get them right as they have implications for my Tax Return!
It doesn't simplify things it makes things difficult or impossible. I've cross-posted this to uk.business.accountancy because PS usually has something to say on this subject and it is a common occurence in DIY Accountancy.
Here's the original post:
My bookkeeper has made some mistakes with my Fixed Asset depreciation and I need to know how to correct it.
My accounts package is Quickbooks 2002 and there are 3 different types of mistake made.
There was an incorrect amount of depreciation applied. This has therefore affected subsequent years balances.
In another year, there was only that years assets that were purchased that were depreciated. The balance from previous years was not included so they have not been depreciated for that year. (I have my assets in a pool and depreciate the total, normally!)
In one year nothing has been depreciated. But, some depreciated has taken place on years after that year of no depreciation.
Can someone please advise me on how tackle these 3 issues? Or any of them!
Then he doesn't "depreciate" his assets in that year either.
Often there is a good business reason to depreciate in a way designed to keep track as realistically as possible of the value of assets, so that the book value pretty well reflects their realisable values.
But where there is no good enough reason to do this, he might as well let his book value reflect the written down pool value instead, to save him keeping track of the pool outwith his accounts proper.
I find it simple to allocate depreciation straight line over estimated useful life and keep the WDV calculations for tax separately. You never know when you may wish you had done it properly and I dont think it's onerous to do it that way.
But that means you need to keep two sub-accounts for each collection of fixed assets with the same acquision year and expected life end year, or else you need to pre-schedule future depreciation entries as and when you acquire assets.
At least with a pool, you can work out by how much to depreciate each year from the present values of the FA and AD accounts.
Agreed, it's desirable, it's not onerous, but it's a bit inelegant not to be able to have everything together.
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