What are accounting write-offs and how can they affect your business accounting?

Accounting amortizations are a term of great importance in the accounting world and the administration of any business. This is because they have a direct effect on the profitability of the same and in payment of personal income tax and corporate income tax, whether you are self-employed, have an established company or an SME. If you are interested in knowing more about accounting write-offs and how they affect your business, this article is for you, join us!

What is an amortization and what does it consist of?

Accounting write-offs is one of the calculations that any company or independent professional must make at the end of the fiscal years. It consists, mainly, in showing periodically the loss of value suffered by some assets already acquired by the company, among others.

This calculation is necessary because when you acquire an asset for your venture, it not only reflects a one-time cost. It also has an impact over time, as long as it continues to maintain its usefulness, even if it loses its value due to impairment.

An example of depreciation would be the purchase of a vehicle for your company. You can assume that it will have a useful life of at least 10 years, so its cost will be spread over the time it will be used to generate income. 

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What is known as a fixed asset?

To understand what accounting depreciation is, it is necessary to define the term fixed assets. This term refers to the assets owned by the company and which, at the same time, contribute to the development of the company’s activity.

Generally, these types of goods are purchased for a determined value, but either through the passage of time, use, enjoyment or obsolescence, they lose their initial value.

What assets can you depreciate?

Depreciation can be applied to any property, plant and equipment, intangible assets or buildings that you own and that are attached to or affected by the business.

An asset begins to be depreciated from the time it is put into operation to generate income until the sum of depreciated amounts, each year, reaches the value it had when it was acquired.

What do you need to calculate the accounting write-offs of assets?

In order to calculate the accounting depreciation of a fixed asset, you must take into account some fundamental points that will help you when deciding to acquire a new asset for your business:

• Acquisition price: this is the price at which you acquire the asset.
• Useful life: it is necessary to evaluate the time in which this asset will be operating at 100% of its capacity, since the law evaluates a maximum useful life period for each type of fixed asset.
• Residual value: this refers to the value of the asset at the end of its useful life. That is, the value that you would put on the asset if you had to sell it.

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What calculation methods are applied to accounting depreciation?

Accounting depreciations are made on an annual basis. All companies must record in each fiscal year the revaluation of assets during that period. Therefore, the most common ways of reflecting the depreciation of assets in a company’s accounting records are as follows:

Straight-line depreciation

The straight-line method consists of depreciating an asset through equal annual depreciation installments. This can be done in two different ways:

• By means of a percentage: an annual coefficient is assigned to each type of fixed asset, which is multiplied by the acquisition value. In this case, the formula would be as follows:

Annual depreciation = Acquisition value x coefficient (%)

• Using the useful life: the acquisition value of the asset must be divided by the useful life of the asset. Here we apply the following formula:

Annual depreciation = Acquisition value / useful life

Declining balance amortization

In this method, a percentage is applied to the value pending amortization, taking into account that in each year the value decreases. According to the official tables, the percentages can be:

• 1.5%, when the asset has an amortization period of less than 5 years.
• 2%, if the asset has a period equal to or greater than 5 years, but less than 8 years.
• 2.5%, when the asset has an amortization period equal to or greater than 8 years.

For the calculation of the increasing depreciation, it is necessary to consider that, firstly, a period of useful life is assigned to the asset. Secondly, the sum of the digits is made in decreasing form and the calculation for the depreciation installment is made in this way:

Fee = (acquisition value / sum of digits) x digit. 

Accounting depreciation per unit produced

Although this method is not the most widely used, it is based on calculating depreciation for each unit produced by the asset annually and not on time or use. For this calculation, a rough estimate of the company’s production in a year must be made. Once this is done, the formula that is usually applied is as follows:

Quota = (acquisition value of the good x Estimated annual production) / Estimated total production

How do I know what amount can be applied to a book depreciation?

As mentioned above, there are different methods for calculating accounting depreciation. However, depreciation tables are the most widely used.

The tables are basically informative tables in which you can check the percentage of the acquisition value that can be depreciated per year and in how many years it can be done. It is, therefore, that these tables serve three columns: 

• One where the type of depreciable asset is located.
• Another where the maximum percentage applicable to the acquisition price is located.
• And finally, one with the maximum years in which the amortization can be carried out.

Depreciation table types

There are different types of depreciation tables to which you must pay attention depending on the legal form you have and the tax regime you comply with. These tables can be:

Depreciation table in Simplified Direct Taxation

If you are taxed under the simplified direct estimation, which is applied in the IRPF regime for the self-employed on a regular basis, the accounting depreciation tables are as follows:

Amortization table of Normal Direct Estimation

This is a straight-line depreciation table for companies and self-employed individuals who pay corporate income tax and self-employed individuals who do so through the direct estimation of personal income tax. The table looks as follows:

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If you are an entrepreneur, you must know how accounting depreciations work and know how to apply them correctly. For this reason and to avoid further complications, I encourage you to contact us through our email tasconsultoria@tas.sl.es. Through it, you can communicate with our advisors who will give you the guidance you need to boost your venture.