# Coefficient of depreciation of fixed assets (formula)

To be able to carry out its activities, the organization applies fixed assets. This property is at the disposal of the company of more than one. These are buildings, equipment, machinery, vehicles, etc. To account for them, a natural and valuation estimate is used.

The first group represents fixed assets in physical units, for example, square meters (buildings), capacities (machine tools). But in a market economy, each element of property has its value. This is the price that the consumer is willing to give, and the manufacturer to offer for a particular object of funds.

To calculate the cost of equipment, apply certain techniques. It is this characteristic that is used to find the coefficient of wear. On its basis, a decision is made on the rational renewal of fixed assets.

## Types of valuation

In the financial and economic analysis, the depreciation of fixed assets is studied from the position of valuation.It is expressed in national monetary units. This allows you to compare and study the dynamics of all groups of funds.

In the same units, the degree of use of fixed assets is represented. When buying a unit of funds submitted, it is characterized as the initial value. Every year equipment and other objects lose their former qualities, grow old. Therefore, with each operating period, the amount of depreciation accumulates.

It is subtracted from the original value. So it turns out the real value of the object at the date of the analysis. During operation, fixed assets may wear out more or less than the expected level. In this case, a revaluation is carried out, the actual depreciation at the date of analysis is determined.

## Initial cost

In accounting, initially the object is taken to the balance at historical cost. This is the amount of funds that the organization paid for the right to own property. Also included are shipping, installation and commissioning costs.

Calculating the coefficient of wear in the first year of operation, they take this value as the base of calculation.At the time of acquisition of the object is determined by its useful life. Similar information is drawn from the relevant documentation with technical specifications.

On this basis, depreciation is charged to the original cost. It corresponds to the full operational amount of depreciation of the object. When it is 100%, depreciation accumulations allow you to update funds.

## Replacement cost

Depreciation of fixed assets does not always correspond to the planned level. In terms of inflation, this allows you to bring the balance (initial) value to market as close as possible. To determine the coefficient of depreciation of fixed assets that were purchased in different years, it is necessary to bring all objects to modern market conditions.

Therefore, in the case of a significant difference in the prices of real and balance sheet, the organization leads to a revaluation. This cost is called replacement. It also depreciates and depreciates with each operating period. This is a laborious process, but in certain cases necessary.

To correctly determine the depreciation rate, as well as an adequate amount of production costs, this action simply cannot be ignored.The replacement cost makes it possible to calculate the real market value of production and depreciation.

## Wear type

There are two main types of wear. The first type is called physical. The coefficient of depreciation of fixed assets is calculated in accordance with this indicator. During operation, component parts, materials of components and systems become obsolete. Equipment and other units of non-current assets gradually lose their ability to perform the functions assigned to them at the same level.

Over time, the number of repairs, downtime. This is physical wear and tear. But there is another variety. In this case, fixed assets are working properly, but the principle of their operation or market value is outdated.

If there is a new technological equipment, which is characterized by greater productivity, quality of finished products, against its background the old objects seem less profitable. This is obsolescence. It must also be considered in the process of depreciation. Revaluation needed.

## Residual value

The amount of depreciation must be taken into account by the financial service of the organization.It allows you to determine the actual book value of the funds at the date of the analysis. The calculation of the coefficient of depreciation of fixed assets is carried out precisely at residual value. To determine it, the actual amount of depreciation is taken from the original or replacement cost.

Analysis of this indicator allows to draw conclusions about the structure of fixed assets, with the help of what equipment (old or new) the company manufactures its products. If the funds are characterized by a high degree of depreciation, the management is simply obliged to develop measures for the renewal of objects of non-current assets. Otherwise, the products will not be competitive, sales revenue will decline.

Only new, modern equipment can help increase the scale of industrial and commercial activities. Therefore, the assessment of the level of depreciation is mandatory in the analysis of non-current assets.

## Coefficient calculation

The coefficient of wear, the formula of which is used in the analysis, is quite simple. But its result is important information. It shows how outdated equipment is. The formula looks like this:

- Kiz = A / PS, where A is the depreciation amount, PS is the initial property valuation.

The data for the calculation is taken from the form № 1 of the balance sheet accounting report. This indicator depends on the chosen method of depreciation. Therefore, to obtain an adequate research result, this information is necessarily taken into account.

The standard value is below the line below 50%. But in order to draw correct conclusions about the state of funds, it is necessary to compare it with analogues of competing enterprises.

## Calculation of physical wear

The depreciation coefficient, the formula of which was considered earlier, may be somewhat changed depending on the actual rate of obsolescence of funds. If in the accompanying documentation the rate of wear was too high, the equipment, buildings, will lose their performance faster. The coefficient of wear in this case is defined as:

- Kiz = If / Ying, where If is the actual depreciation, Ying is the normative value.

If the result is multiplied by 100, you get an indicator in percent. Sometimes it happens that the object is operated for a longer period of time than stated in the accompanying documentation.In this case, the calculation of the coefficient is as follows:

- Kiz = If / (Ying + Yves), where Yves - wear, which is still possible to transfer to the cost in the future.

This approach allows you to calculate the physical obsolescence of funds. But it is also necessary to take into account the level of moral depreciation.

## Obsolescence calculation

The coefficient of depreciation of fixed assets, the formula of which was presented earlier, must also take into account the moral type of obsolescence of property. It can be of two types. The first type of obsolescence occurs when the cost of manufacturing fixed assets is reduced by the companies producing them.

For example, the new equipment presented recently to the consumer, is quite expensive. Only this segment of the market is filled with numerous manufacturers, and competition is growing. The price of objects of such property is reduced. The market value of funds falls. The coefficient in this case is calculated as:

- K1 = (1 - VS / PS) * 100, where VS is the replacement cost.

This type of obsolescence does not cause a loss to the company, since its cost is reimbursed by depreciation savings. But the second type of wear is unfavorable for the organization.It occurs when the market is more productive equipment.In this case, the coefficient is calculated as:

K2 = (1 - Pu / Mon) * 100, where Pu is the performance of the old equipment, Mon is the production of new equipment.

In this case, talking about the lost benefits of the organization. This is a negative trend for the company.

## Depreciation

Depreciation of equipment is compensated by the company through the creation of a special fund. At the time of acquisition of the object on the balance of its initial value, and also determines the period of its operation. During this period, depreciation is calculated using different methods.

The amount of depreciation is transferred to the cost price. The depreciation rate, the calculation of which was presented above, strongly depends on the method of depreciation. Under it fall objects owned by the company (they do not plan to sell in the future), which have been in operation for more than 12 months. A unit of such property must cost at least 20 thousand rubles.

A depreciation fund is necessary for every enterprise. It allows you to gradually accumulate significant amounts of funds for the renewal of fixed assets. Depreciation is charged by different methods.

## Depreciation rate

Investigating the coefficient of depreciation of fixed assets, be sure to determine also the rate of depreciation. This is the statutory level of accruals on cost, which the organization makes based on the amount of its permanent property. It can be considered the officially accepted amount of depreciation. The depreciation rate is determined as follows:

- Na = (PS - LS) / T * PS, where the drug - liquidation value, T - the period of operation.

This is an officially recognized state method of depreciation on cost.

## Some features of the calculation

Studying the coefficient of wear, it is necessary to note several of its features. In a transitional market economy, inflation is quite high. To be able to obtain real data on the value of fixed assets, the cost of production and the amount of obsolete property, it is necessary to reevaluate it more often.

In developed countries, this process occurs on average once every 10 years, but domestic enterprises estimate the real market value of funds more often. Once in 1,5-2 years such work is carried out. This allows you to calculate the actual wear rate.The management of the company based on the results of the research can make the right decisions about the renewal of fixed assets.