Asset Depreciation
ERPNext calculates and schedules asset depreciation automatically based on the chosen Depreciation Method, the Total Number of Depreciations, and other vital parameters like the Available for Use Date in the Asset record. These calculations ensure that your asset's book value is reduced methodically in line with accounting rules and usage of assets.
While creating an asset, make sure to tick the "Calculate Depreciation" checkbox. Only then will the system generate a depreciation schedule that matches your financial reporting needs.
ERPNext supports maintaining multiple depreciation schedules for the same asset across different Finance Books (such as for tax vs. accounting purposes), allowing businesses to stay compliant with varying financial regulations.
Different Depreciation Methods in ERPNext
Straight Line Method
Straight Line technique depreciates the asset by the same amount over the same period of time that it has useful life down to the residual or salvage value. The straight line method would be the best where the asset provides a fixed value generation in a long run.
Example: An example in which this is used is a 5 year asset priced at 1000 and having a salvage value of 500, the ERPNext is calculated by dividing the difference (1000-500) by 5 i.e., it will be removed 100 each year.
For more detailed depreciation:
- Allow "Depreciate based on daily pro-rata" to calculate depreciation on a varying basis depending on the number of days between calendar periods (e.g., Feb vs. March).
- Allow "Depreciate based on shifts" where the asset is utilized for several shifts in a day. You need to set up shift types and their relative depreciation factors in the Asset Shift Factor Doctype (for example, Half = 0.5, Single = 1, Double = 1.5, Triple = 2). These factors are then utilized by the system to calculate depreciation.
When shifts change from month to month, employ the Asset Shift Allocation facility to adjust the quantity of shifts for a specific duration. ERPNext will automatically redistribute the existing shifts in the schedule to create a level of consistency throughout the asset's life.
Double Declining Balance Method
Also referred to as the 200% Declining Balance Method, this method speeds up depreciation in the asset's early years. It's appropriate for assets that depreciate significantly immediately after purchase, like cars or computer equipment.
Example: If an asset has a cost of ₹100,000 with a salvage value of ₹11,000 and a useful life of 8 years, the depreciation pattern will be progressively decreasing, with greater depreciation in the first few years and less in subsequent years.
ERPNext computes the rate of depreciation as 2 × Straight Line Rate, and applies it to the Book Value at the beginning of each period, but without depreciating below the salvage value.
Written Down Value (WDV) Method
Under the Written Down Value method, depreciation is worked out at a constant percentage of the book value (balance asset value) at the start of every depreciation period. The result is higher amounts of depreciation in the early years and decreasing amounts in subsequent years.
You may either:
- Manually specify a Depreciation Rate, or
- Have ERPNext calculate it automatically using the formula on the basis of the asset's purchase price, salvage value, and useful life.
Example: And at a price on an asset as ₹1000 and rate of depreciation as 40%. Depreciation will be done as follows in ERPNext:
- Year 1: ₹1000 × 40 % = ₹400
- Year 2: 600(1.4) = 240
- Year 3: 360(x) 40% = 144 and so forth, until salvage value of the asset.
It is applicable to high-tech or new equipment that soon becomes outdated.
Manual
In the Manual Depreciation approach, ERPNext continues to calculate a default depreciation schedule based on the purchase price of the asset, salvage value, and depreciation method as reference. Yet, you have full control to manually change depreciation dates and amounts according to business needs. This is particularly handy in situations where depreciation does not map onto a uniform or system-driven pattern—like situations involving irregular use, legal requirements, or internal financial realignments.
Each row of depreciation record within the schedule may be varied to indicate a particular amount, granting finance teams flexibility in matching to actual consumption of assets or to occasional variation in asset value.
Automatic Depreciation Entries
ERPNext enables you to post depreciation entries automatically through the Accounts Settings module. Enabled, it will automatically generate depreciation Journal Entries on the planned dates, minimizing the workload on your accounting team and ensuring accurate and timely financial reporting.
This capability is especially useful for companies with a high number of assets, as it dispenses with manual intervention while keeping you compliant.
If this option is disabled, depreciation entries may also be made manually by clicking the "Make Depreciation Entry" button in the relevant row of the Depreciation Schedule on the Asset record. This provides companies with flexibility to create depreciation transactions manually or make adjustments prior to booking entries.
Accounting Entries on Depreciation
Upon making a depreciation entry, ERPNext automatically calculates the accounting effect by applying standard double-entry bookkeeping:
- The Accumulated Depreciation Account is credited, which decreases the book value of the asset.
- The Depreciation Expense Account is debited, which boosts operating expenses in the Profit & Loss statement.
They can be defined at the level of the Asset Category so that similar assets can be treated in the same way, or they can be overridden at the level of the Company, to apply more general accounting policies. This is a two-tier control, which gives flexibility and consistency across departments and business units.
ERPNext also has Accounting Dimensions, so depreciation postings can be filtered or tagged by cost center, project, or branch—convenient for more in-depth financial analysis.
Asset Value Chart
To allow the user to better see depreciation over time, ERPNext includes an interactive line graph below every asset's depreciation schedule. The Asset Value Chart graphs the net book value of the asset at each point of depreciation so that users can easily see how the value of the asset decreases over time.
The chart auto-refreshes as changes to the depreciation schedule are made manually or automatically, providing an instantaneous and clear financial picture of each asset.
These improvements in ERPNext provide transparency, flexibility, and automation of asset depreciation, enabling businesses to keep fixed assets with improved accuracy and compliance.