1 Definition of depreciation and main influencing factors of depreciation
The meaning of 1. 1 depreciation
The most commonly accepted definition of depreciation is a systematic and reasonable method to allocate the cost of assets to each income period. This definition is a static concept. The original price or other value of an asset remains unchanged during its service life, and the total depreciation is equal to the original price minus the residual value [2].
1.2 Some necessary conditions to be considered in the accounting process
1.2. 1 maintenance
In the process of calculating the depreciation allocation of fixed assets, we must consider the daily operating expenses such as repair and maintenance of fixed assets, because depreciation is closely related to repair and maintenance: first, the expected service life of assets is directly related to the degree of repair and maintenance; Second, because most assets include many parts with different service lives, many so-called maintenance is actually replacement; Third, in the process of using assets, the efficiency decreases year by year, especially the lack of necessary and timely maintenance.
1.2.2 service life of fixed assets
Fixed assets have a certain service life. Changing the cost of repair and maintenance can extend or shorten the service life of assets. In some cases, some assets can be kept indefinitely, but the cost of doing so is often higher than the cost of replacing new assets. Therefore, it is not economical to continue to maintain an outdated equipment. On the other hand, if the economic life of an asset is short, its repair and maintenance costs can be minimized. Generally speaking, the service life of assets depends on the most appropriate level of repair and maintenance costs or economically outdated factors, whichever is shorter. If the repair and maintenance costs are unreasonably reduced, so that the assets can not reach their expected economic life, the depreciation expenses allocated in the current period will increase accordingly.
Accountants have long recognized that the life of factories and equipment is limited, so they must consider how to deal with the assets on the books when they are scrapped. In recent years, depreciation is regarded as a systematic allocation of the cost or other value of an asset during its service life, which is called cost allocation method, and it is a systematic and reasonable allocation of the cost or other value of an asset during its service life. When choosing the cost allocation method, the following factors must be considered [3]: (1) the relationship between the value of assets decreased due to use and the decrease of asset market value; (2) outdated influence; (3) the expected repair and maintenance methods; (4) the expected decline in operating efficiency; (5) Changes in expected return on assets; (6) The life and interest factors of long-term assets, and the uncertain factors in the later period of asset service life.
2 Main methods and comparison of depreciation
2. 1 depreciation calculation method
Theoretically speaking, the above factors should be considered when choosing depreciation method, but in practice, only one or several factors play a decisive role in most cases, and other factors with little influence can be ignored. Usually, among several commonly used depreciation methods, if one method is generally reasonable or meets the requirements of the income tax law, you can choose this method. Depreciation method is a rule that enterprises should follow when extracting depreciation of fixed assets. Usually, there are two depreciation methods for fixed assets, one is the straight-line method, and the other is the accelerated depreciation method. According to the present situation and actual requirements of Chinese enterprises, the Ministry of Finance has reformed the single depreciation method, added accelerated depreciation methods, and allowed enterprises to coexist with multiple depreciation methods. Average life method, workload method, mileage method and accelerated depreciation method can be used by general enterprises. Accelerated depreciation methods include declining balance method, double declining balance method, sum of years method, average life method, workload method, annual declining rate method, annuity method and sinking fund method. Considering the actual situation in China, the Ministry of Finance stipulates that there are generally four depreciation methods for enterprises to choose from, namely, the average life method, the workload method, the double declining balance method and the sum of years method. According to the current situation of enterprises and the financial affordability of the state, China also limits the scope of application of accelerated depreciation methods. For electronic production enterprises, shipbuilding enterprises, machinery enterprises that produce "mother machines", aircraft and automobile manufacturing enterprises, chemical and pharmaceutical production enterprises and other industrial enterprises approved by the Ministry of Finance, the depreciation of machinery and equipment can be accelerated by double declining balance method or sum of years method.
2.2 Discussion on several commonly used depreciation methods
Although there are many depreciation methods, there are only four depreciation methods that enterprises are allowed to choose in China: straight-line method, workload method, double declining balance method and sum of years method. Once the depreciation method is determined, it shall not be changed at will. If changes are needed, they should be explained in the notes to the financial statements [4]. In recent years, people have shown great interest in the accelerated depreciation method, and the author also thinks that this method is more practical and covers more problems than other methods. Four methods are described and compared below.
2.2. 1 straight line method
The straight-line method, that is, the average life method, assumes that depreciation is due to the passage of time rather than the use relationship, and thinks that the decisive factor for the decline of use potential is the obsolescence and damage caused by the passage of time rather than the tangible wear and tear caused by use. Therefore, it is assumed that the service potential of assets is the same in all accounting periods, regardless of their actual use.
Because the straight-line method is relatively simple, it is correct only under the following conditions: (1) The interest factor can be ignored, or the investment cost is assumed to be zero; (2) The cost of repair and maintenance is fixed during the whole service life of the asset; (3) The asset efficiency in the latest year is the same as that in the first year; (4) The income (or cash flow) obtained from the use of assets is fixed throughout the service life; (5) All necessary estimates (including expected service life) can be predicted with considerable certainty.
Due to the uncertainty of the above factors, it is difficult to make any depreciation method take all factors into account. If some factors can be properly offset, it is generally considered that the straight line method is the most suitable. For example, the decrease in operating efficiency and the increase in maintenance costs are just offset by the increase in income and the decrease in insurance premiums and property taxes. In addition, because the straight-line method is easy to understand and calculate, and the depreciation extracted in each year or month during the effective use period of fixed assets calculated by this method is equal, the product cost of enterprises is stable and comparable.
But at the same time, the straight-line method also has some shortcomings, which ignores the discount factor. The net profit calculated by the straight-line method will give people the illusion that the rate of return on total invested capital is increasing.
Workload method
The workload method is a method to calculate depreciation according to the expected workload of fixed assets in the calculation period. The workload method is essentially a supplement and extension of the average life method. According to the regulations, passengers, trucks, large-scale equipment and large-scale construction machinery of enterprise professional fleet can be depreciated by workload method. Due to the different workload indicators of various professional equipment, the workload method can be divided into mileage depreciation method and working hours depreciation method. The workload method assumes that depreciation is a variable, not a fixed cost, that is, it assumes that the decrease in asset value is not due to the passage of time, but to use.
For many kinds of assets, the assumption of workload method is reasonable, especially when tangible loss is more important than economic depreciation.
Therefore, if an asset is not used within one year, it should not be counted as depreciation expense, because the use value of the asset has not decreased. Even though depreciation is an important factor to determine the expected service life of assets, if its depreciation is foreseeable and the general use of assets can be estimated, the depreciation method based on business activities can be adopted. The main purpose of using this depreciation method is to allocate input value according to each service unit, and the measurement of service value reduction is secondary.
Although the workload method seems to be very ideal when the service value of assets decreases with use, it often has some serious shortcomings in use:
(1) Even though the depreciation expense changes every year, the workload method is still similar to the straight-line method. Because it assumes that each service unit is allocated an equal amount of depreciation expense, but it is unfounded to assume that the cost of each service unit is equal. Moreover, because some service units are still to be used in the future, the reduction of the whole service value is actually unbalanced, unless the interest rate is assumed to be zero;
(2) the workload method does not take into account the increase in repair and maintenance costs, as well as the decline in operating efficiency or income.
2.2.3 accelerated depreciation method
Double declining balance method and sum of years method are both accelerated depreciation methods. The conditions for adopting the accelerated depreciation method are as follows: (1) The annual service contribution will be reduced without considering the interest or cost of funds; (2) The decrease of operating efficiency will lead to the increase of other business expenses; (3) The value of assets decreased more in the early stage and less in the later stage; (4) Even if the service value consumed in the early stage and the later stage is the same, the discounted value is different, so the cost of the service value in the early stage is higher than that in the later stage; (5) increase the cost of repair and maintenance; (6) Cash income is decreasing year by year; (7) The uncertainty of future annual income caused by the possibility of depreciation.
One of the main arguments of adopting accelerated depreciation method is that the decreasing contribution of net income of assets is related to operating efficiency, and its influence on depreciation expenses to be borne in each period is the same. The decrease in net income of assets may be due to the need for more repair time and repair costs in the later period of assets, or the excessive use of assets is prone to accidents, thus reducing the use, or it may be due to the decrease in operational efficiency and output. The decrease of operation efficiency will also lead to the increase of fuel cost and labor cost, or cause great waste of raw materials. All these show that the net income of assets in the later period is less than that in the previous period. Therefore, even if the interest cost is not included, the reduction of net income of assets proves the rationality of accelerated depreciation method.
The decline in expected cash income is also a reason for adopting the accelerated depreciation method. It can be considered that the original cost of assets in the early stage is greater than that in the later stage, so the depreciation expense in the early stage should be greater than that in the later stage.
The cost of repair and maintenance is increasing year by year. In order to compensate the increasing cost of repair and maintenance, accelerated depreciation method should be adopted. Repair and maintenance costs are related to depreciation and should be included in the calculation of total service cost or net income.
One of the most difficult factors in the allocation of depreciation expenses is uncertainty. Expected service life, expected net income and future maintenance costs are uncertain. In most cases, uncertainty can be transformed into a single definite value according to the adjusted expected value of risk selection. The uncertainty of income provides a certain basis for accelerated depreciation method. Because the early income is more certain than the late income, the late income should be discounted more when making investment decisions, so most of the asset cost should be allocated to the early period. Although these uncertainties are not enough to prove that the accelerated depreciation method is reasonable, compared with other methods, the accelerated depreciation method is more inclined to the law of cash receipts and payments.
3 Suggestions for improving the depreciation of fixed assets
All the above depreciation methods are arbitrary, and the data they are based on, such as cash flow or net income, are quite difficult to measure. Therefore, depreciation methods need to be constantly updated and improved. Options that can be considered are:
(1) The value of the remaining assets is measured by the market price at the end of each period, and there is no distribution method;
(2) Replace the income statement with cash flow statement and capital flow statement to avoid depreciation distribution;
(3) Pay attention to the use of predictable unified depreciation method, regardless of its logic;
(4) Try to adopt a compromise distribution method.
In essence, depreciation is also a kind of expense, but this expense does not pay real monetary funds during the accrual period, but it has already occurred in the early stage, and the income of this expense is realized within the effective use period after the assets are put into use. Depreciation needs to be accrued from accrual basis principle or income-expense ratio principle. Enterprises should choose depreciation methods reasonably according to the applicable conditions of various depreciation methods.