4.1 Cost planning and cost accounting

Depreciation refers to the loss in value of company assets (fixed assets and current assets). Depreciation is abbreviated as AfA = Absetzung für Abnutzung. Depreciation is the imputed cost for the consumption or replacement of fixed assets such as machinery, equipment, IT, fixtures and fittings and other capitalisable goods.

The principle of depreciation is based on the fact that a company buys an investment item and can claim the purchase as operating expenses in subsequent years in a cost-effective manner within the framework of depreciation. The company must secure the capital for the purchase price through equity or debt capital.

While the acquisition and production costs must be paid in full immediately by the entrepreneur, the Afa can only be offset against a fraction of the costs in the P&L in subsequent years. The Afa thus stipulates that the costs for assets that are used in the business for more than one year must be allocated in equal or declining-balance annual amounts over the "normal useful life".

With the Afa, the assets are included in the depreciation cycle of the company. The aim is to be able to purchase the impaired goods again after the value has been consumed.

Stages of depreciation:

• The impairment of fixed assets is recognised through annual depreciation.
• Depreciation distributes the acquisition costs of an asset over its useful life (years).
• Depreciation reduces profit as an expense.
• Depreciation co-finances new investments, which is why it is taken into account in the calculation. 

On the one hand, depreciation is a business method for determining the consumption of value; on the other hand, it is an instrument of tax assessment by the tax office. The state can increase or decrease its revenue from corporate taxes via the amount of depreciation. As a result, federal governments have changed the conditions for depreciation several times.

Linear depreciation

Under the Income Tax Act, the following depreciation rules currently apply.

• Low-value assets (GWG) can be depreciated up to a sum of € 150 in the year of acquisition; from € 150.01 to € 410 in the year of acquisition or fully depreciated according to ordinary useful life.
• Assets are depreciated on a straight-line basis over a certain depreciation period as a constant percentage of the acquisition or production cost of the asset.
• Useful life: e.g. computers 3 years, cars 6 years, office furniture 13 years, workshops and machinery up to 25 years.
• A fixed asset that can be used for three years is depreciated at 33 1/3% percent. The asset shall be listed in the fixed asset schedule.

 

E.G.: Linear depreciation of a computer over 3 years, acquisition costs € 2,000

Year	Linear depreciation Years in %and €	Residual value on 31.12.of the year
Acquisition costs	3 years	2.000 €
Depreciation in the 1st year	33 1/3 % = 666,66 €	1.333,34 €
Depreciation in the 2nd year	33 1/3 % = 666,66 €	666,68 €
Depreciation in the 3rd year	33 1/3 % = 666,68 €	0 €

 

Degressive depreciation 

In the case of declining balance depreciation, the depreciation rate is applied to the residual value of the asset. In this case, the depreciation rate may be 2 ½ times as high as with straight-line depreciation, but not higher than 25 % per year. The book value will never reach "zero" under this method. Therefore, it is possible to switch from declining balance to straight-line depreciation.

e.g. declining balance depreciation of office equipment, acquisition cost € 2,000, useful life 10 years

Year	Degressive depreciation of the years in %.	Residual value on 31.12.of the year
Acquisition costs	Max. 25 % per year	2.000 €
Depreciation in the 1st year	25 % = 500 €	1.500 €
Depreciation in the 2nd year	25 % = 375 €	1.125 €
Depreciation in the 3rd year	25 % = 281,25 €	843,75 €
Depreciation from 4th year to 10, years	Change to linear depreciation 843,75 € : 6 years = 140,62 € per year	703,12 €
Depreciation from 4th year annually	140,62 €	0 € in 10 year

 

Principles of the Afa

Depreciation, as an operating expense, reduces a company's profit and thus its tax burden. By extending the useful life of an asset, the state can increase tax. In other words, the company invests and pays today, but only enjoys the full tax deduction of its costs in subsequent years (up to 25 years).

Depreciation is sometimes treated differently from a business point of view (from the point of view of the company) and from a tax point of view (from the point of view of the tax authorities). For example, a machine that has already been depreciated and is carried as fixed assets with a memo value of € 1. It can still provide full performance in the operational process without causing imputed costs. However, this no longer has any effect for tax purposes.

Depreciation in the business plan

1.       It must be decided whether it is a depreciable asset. 

2.       Low-value assets are depreciated in the year of acquisition.

3.       For all other assets, the useful life is to be determined from the tax office or tax advisor, if necessary. The total amount is to be determined by the useful life (on a monthly or annual basis). The depreciation tables of the tax office apply. (see also on the internet)

4.       The depreciation amount is to be taken into account in the profit and loss account as imputed operating expenses. The depreciation increases the operating expenses and thus reduces the taxable profit.

5.       The depreciation amount is to be taken into account in the price calculation as imputed consumption of value.

6.       The depreciation amount must be taken into account in the liquidity planning. Since depreciation is assessed as imputed operating expenses and is included in the P&L, it increases liquidity when it is determined. Liquidity is increased by the amount of depreciation.  

Depreciation is used as a cost in the calculation of sales prices. The calculated depreciation amounts flow back into the company in the form of liquid funds via the sales revenues. Therefore, depreciation must be added to revenues in the liquidity calculation. With the depreciation, acquisitions are made possible from depreciation returns. Depreciation is therefore also an important means of financing.