how does fund accounting handle depreciation
Fund accounting handles depreciation by accurately recording and tracking the depreciation of assets over their useful life. To understand how it is done, here's a step-by-step explanation:
1. Identify the asset: The first step is to identify the asset that is subject to depreciation. This can include tangible assets like buildings, vehicles, and equipment, as well as intangible assets like patents or copyrights.
2. Determine the useful life: The useful life of an asset represents the estimated period over which it will provide economic benefits. This can vary depending on the asset type and industry standards. For example, a vehicle may have a useful life of 5 years, while a building may have a useful life of 30 years.
3. Calculate the depreciation method: There are various methods for calculating depreciation, including straight-line depreciation, declining balance depreciation, and units-of-production depreciation. Fund accounting typically follows the straight-line method which evenly spreads the cost of an asset over its useful life.
4. Calculate the annual depreciation expense: Once the depreciation method is determined, the next step is to calculate the annual depreciation expense. This involves dividing the cost of the asset by its useful life. For example, if a vehicle costs $20,000 and has a useful life of 5 years, the annual depreciation expense would be $4,000 ($20,000 / 5).
5. Record the depreciation expense: The annual depreciation expense is then recorded in the appropriate accounting period. It is typically recorded as an expense on the income statement and simultaneously reduces the value of the asset on the balance sheet.
6. Monitor and update depreciation: Fund accounting requires ongoing monitoring and updating of depreciation. As each accounting period passes, the depreciation expense is recorded and the asset's value is reduced accordingly. This ensures that the financial statements accurately reflect the decrease in the asset's value over time.
By following these steps, fund accounting effectively handles depreciation by accurately recording and tracking the decrease in the value of assets, ensuring transparency and compliance with accounting standards.