Tracking depreciation can be a major pain point for businesses using Xero. Many small business owners would likely agree that understanding fixed asset values over time is critical yet complex.
Luckily, Xero provides powerful built-in tools for tracking asset depreciation. This guide will walk through exactly how to leverage Xero's features to easily track and report on fixed asset values.
You'll learn key concepts like diminishing value depreciation, see step-by-step instructions for setting up assets and rules in Xero, and discover tips for streamlining ongoing management of depreciation. Plus, the conclusion recaps key takeaways and explores integrations to further enhance fixed asset tracking.
Mastering Fixed Assets Depreciation with Xero
Understanding Fixed Assets and Depreciation in Xero
Fixed assets are long-term tangible assets that provide value to a business over many years. Examples include buildings, equipment, furniture, vehicles, etc. As assets age and deteriorate through use, their value decreases - this is known as depreciation. Tracking depreciation allows businesses to properly record asset value over time for reporting and tax purposes.
Xero is an online accounting platform that automates fixed asset depreciation tracking. Key terms related to fixed assets in Xero include:
- Cost: The purchase price of an asset.
- Useful Life: The estimated functional lifespan of an asset, used to calculate depreciation.
- Depreciation Method: The approach used to allocate asset cost over its lifespan - Xero supports straight-line, diminishing value, and custom depreciation methods.
- Carrying Value: The asset's worth after accounting for accumulated depreciation to date.
Properly tracking assets and depreciation is crucial for accurate financial reporting and maximizing tax deductions over time.
The Advantages of Using Xero for Asset Value Tracking
Xero provides several key benefits for fixed asset tracking including:
- Automated depreciation calculations based on useful life and depreciation method settings.
- Integration with invoices to easily add assets purchased on credit.
- Customizable reports showing asset cost, accumulated depreciation, carrying value, and depreciation expense over time.
- Version control for changes to asset details and values.
By leveraging Xero's fixed asset tracking tools, businesses can save significant time on manual reporting and focus more on core operations. The system enhances transparency and accuracy around asset valuation for better financial decision making.
How do you depreciate fixed assets in Xero?
To depreciate fixed assets in Xero, follow these steps:
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In the Accounting menu, select Advanced, then click Fixed Assets. This will take you to the Fixed Assets register.
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Click "Run Depreciation". This will open the Run Depreciation screen.
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Select the date you want to calculate depreciation up to. This is typically the end of your financial year or reporting period.
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Review the depreciation preview to ensure the calculated depreciation expenses look accurate.
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Click "Confirm" to post the depreciation transactions.
This will calculate and post depreciation for all fixed assets in Xero to the selected date based on the depreciation settings for each asset.
Key things to note:
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Make sure all fixed assets are set up correctly with purchase date, value, and depreciation settings before running depreciation.
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You can run depreciation as often as you like, but typically match it to your reporting periods.
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The depreciation expenses will be posted to the accounts configured in the asset settings.
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Review depreciation reports afterwards to check if any manual adjustments are needed.
So in summary, running depreciation in Xero is a simple automated process to track and calculate asset depreciation over time. Just ensure assets are set up accurately first.
How do you depreciate an asset value?
The straight-line depreciation method is a simple way to calculate an asset's depreciation over its useful life. Here are the key steps:
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Subtract the asset's salvage value from its original cost to determine the depreciable basis. Salvage value is how much the asset is expected to be worth at the end of its useful life.
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Divide the depreciable basis by the number of years in the asset's estimated useful lifespan. This gives you the depreciation expense per year.
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To calculate monthly depreciation, divide the annual depreciation expense by 12 months.
For example, if you purchased equipment for $10,000, estimated a $1,000 salvage value, and determined a 5-year useful lifespan:
- Depreciable basis = Cost - Salvage value = $10,000 - $1,000 = $9,000
- Annual depreciation = Depreciable basis / Useful life = $9,000 / 5 years = $1,800
- Monthly depreciation = Annual depreciation / 12 = $1,800 / 12 = $150
So with straight-line depreciation, the equipment would be depreciated by $150 per month over its 5-year lifespan.
Tracking depreciation allows you to allocate the asset's cost over time and account for wear and tear. This method is easy to set up in accounting software like Xero. You simply add details like purchase date, cost, salvage value, and lifespan for each fixed asset. Xero can then automatically calculate and record depreciation.
What is the residual value in Xero depreciation?
The residual value in Xero refers to the estimated value of a fixed asset at the end of its useful life or depreciation schedule.
When setting up depreciation for a fixed asset in Xero, you can enter a residual value amount. This represents the amount you expect the asset to be worth when it has been fully depreciated according to the depreciation method and useful life that you set.
Some key things to know about residual value in Xero:
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Entering a residual value amount will reduce the depreciation expense recorded each year. This is because Xero calculates depreciation as:
(Asset Cost - Residual Value) ÷ Number of Years
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If you don't enter a residual value, Xero will depreciate the asset down to $0 over the useful life.
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The residual value is an estimate and may differ from the actual value you are able to sell the asset for at the end of its life.
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You can find the residual value for an asset on the Fixed Asset Details screen in Xero.
So in summary, entering an accurate residual value allows you to more precisely match depreciation expense to the actual expected decline in useful value of the fixed asset over time. Leaving it blank means the asset will be fully depreciated to zero, which may overstate depreciation.
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How does Xero calculate diminishing value depreciation?
Xero uses the diminishing value method to calculate depreciation for fixed assets. This means the depreciation expense is higher in the first years of an asset's useful life and declines in later years.
Specifically, Xero calculates annual depreciation by multiplying the depreciable value of the asset less previous depreciation, by the depreciation rate set for that asset.
For example, if you purchase equipment for $10,000, set a depreciation rate of 30%, and the equipment has no prior depreciation, Xero will calculate the first year's depreciation as:
- Depreciable value: $10,000
- Depreciation rate: 30%
- Calculation: $10,000 x 30% = $3,000
So the first year's depreciation expense would be $3,000.
In the next year, Xero will calculate depreciation based on the remaining depreciable value of $7,000 ($10,000 original cost minus $3,000 prior depreciation). Using the 30% diminishing value depreciation rate, the second year's depreciation would be $2,100 ($7,000 x 30%).
This declining depreciation expense each year reflects the diminishing value method's assumption that assets lose more value in early years. Xero automates these annual calculations, making it easy to track depreciation over an asset's lifespan.
Setting Up Fixed Assets in Xero
How to Add a Fixed Asset to the Register in Xero
To add a fixed asset in Xero, first navigate to the Fixed Assets tab. Click "Add Fixed Asset" and fill out details like the asset name, purchase date, supplier, cost, estimated useful life, and warranty expiration. You can add purchase orders and attach images as well. This builds the fixed asset register with all relevant asset details.
Key details to capture when adding fixed assets:
- Asset name and category (Vehicles, Equipment, Buildings etc.)
- Purchase date and cost
- Supplier name and purchase order details
- Serial numbers or identification details
- Warranty expiration date
- Estimated useful life
You can also import your fixed asset register from a CSV file instead of manual data entry.
Setting Up Depreciation Rules and Schedules
Xero allows you to configure depreciation rules and schedules specific to each fixed asset category.
To setup depreciation:
- Navigate to Settings > Fixed Assets
- Click "Add depreciation rule"
- Select the method (Straight Line, Diminishing Value etc.)
- Input depreciation rate and frequency
You can create multiple rules and match them to asset categories. For example:
- Vehicles - 30% Diminishing Value, Yearly
- Equipment - 15% Straight Line, Monthly
- Buildings - 2% Straight Line, Yearly
This automates the calculation of depreciation expenses based on accounting guidelines.
Associating Fixed Assets with Xero Account Codes
Connecting fixed assets with their corresponding general ledger accounts enables automated journal entries for depreciation, gain/loss on disposal etc.
To link accounts:
- Edit the fixed asset
- Scroll to "Accounts" section
- Map relevant accounts like Depreciation Expense, Asset Disposal etc.
With accounts mapped, Xero will automatically record depreciation without any manual journal entries. You can also run fixed asset and depreciation reports.
Ongoing Management of Asset Value in Xero
Effectively maintaining accurate fixed asset registers and up-to-date valuations is critical for producing reliable financial statements. Xero provides tools to simplify these asset management tasks.
Adjusting Asset Values and Confirming Depreciation
When assets face impairment, get damaged, or have significant value changes, their net book value and future depreciation expense must reflect these impacts. Rather than editing individual assets, Xero enables bulk updates to:
- Revalue assets by a set amount or percentage
- Update useful life estimates
- Record impairment journal entries
- Confirm automated depreciation calculations
This streamlines processes to keep the asset register aligned with your real-world situation.
How to Run Fixed Asset Reports in Xero
Xero has preset reports to extract key asset data for financial reporting and decision-making:
- Asset Register - Details all capitalized assets with acquisition dates, costs, accumulated depreciation, and net book values
- Depreciation Schedule - Future depreciation expense projections for each asset
- Fixed Asset Reconciliation - Summarizes movements in fixed asset accounts over a period
Additional Profit & Loss, Balance Sheet, and custom reports provide further visibility. Scheduled report exports automate delivery to stakeholders.
Automating Depreciation Calculations in Xero
Recording monthly depreciation doesn't need to be a manual process. Xero enables setting up fixed asset rules to automatically calculate and post depreciation journal entries based on:
- Depreciation method (straight-line, diminishing value etc.)
- Useful life
- Residual value percentage
This saves significant time and ensures depreciation is accurately tracked against your assets.
Conclusion: Harnessing Xero for Effective Fixed Asset Depreciation Tracking
Recap: The Strategic Value of Asset Depreciation Tracking in Xero
Accurately tracking fixed asset depreciation in Xero provides several key benefits:
- Enhanced financial reporting and transparency into asset value over time
- Simplified tax compliance through automated depreciation calculations
- Tighter control over assets and insight for better decision making
By leveraging Xero's tools to systematically record depreciation, businesses can streamline accounting processes and access the information needed to optimize asset utilization.
Exploring Additional Online Accounting Software Integrations
To further extend Xero's fixed asset management capabilities, apps like Fintrack offer added functionality like:
- Customizable depreciation calculation methods
- Automated journal entries for depreciation
- Mass asset data importing
- Fixed asset reporting and tracking
Integrating a specialized fixed asset app can provide more robust accounting and deeper analytics around assets.
Next Steps for Enhancing Asset Management
To continue improving fixed asset tracking, businesses can:
- Consult an accountant to customize depreciation settings
- Review Xero's help guides for advanced feature education
- Contact Xero support to ensure full utilization of all built-in fixed asset tools
Dedicating time to learn and leverage Xero's platform tools around fixed assets can yield major financial clarity and operational efficiency gains.
