1 What is an Offset Account?
One that reduces the gross amount of another account to derive a net balance. Accumulated depreciation, which is a contra account to fixed assets to obtain book value, is an example of an offset account. Discount on note payable, which is a reduction of notes payable to derive the carrying value, is another example.
Advantages of an Offset Account?
The biggest advantage of an offset account is that it enables you to radically reduce how much you owe by cutting the time it takes to pay off a home-loan. home-loan. It often suitable suitable for business owners who have irregular irregular cash flows, that can take advantage of the lower interest. This is often a great trade off when higher interest needs to be charged charged on low doc doc or no doc doc home loans. loans. Offset accounts reduce the compound interest that drastically increases the size of loan payments, and it is throug through h increme incremental ntally ly reducing reducing the principa principall through through the offset offset account account that that signifi significant cant savings savings can be afforded. Also, by utilizing interest accrued to reduce the size of principal the user of an offset account is able to avoid paying any any tax on interes interestt earned on savings. savings. Types of Offset Account
There are two types of offset account: - the 100% offset account and the partial offset account. The only difference between these is determined by just how much of their savings the client is willing to commit towards reducing the principal. Depreciation
Depreciation is the process of allocating the depreciable cost of a long-lived asset, except for land which is never depreciated, to expense over the asset's estimated service life. Depreciable cost includes all costs necessary necessary to acquire an asset and make it ready for use minus the asset's expected expected salvage value, which is the asset's worth at the end of its service life, usually the amount of time the asset is expected to be used in the business business
How to Calculate Depreciation
Deprec Depreciati iation on expense expense is calcula calculated ted utilizi utilizing ng either either a straigh straightt line line deprec depreciati iation on method method or an acceler accelerated ated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset.
2 The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below.
Straight Line Depreciation Method The straight line depreciation method divides the cost by the life. SL = Cost / Life Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the annual depreciation as follows: 487.65 / 5 = 97.53 Each year for 5 years $97.53 would be expensed. Declining Balance Depreciation Method The declining balance depreciation depreciation method uses the depreciable depreciable basis of an asset multiplied by a factor based on the life of the asset. The depreciable basis of the asset is the book value of the fixed asset -- cost less accumulated depreciation. The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator. For example, an asset with a four year life would have 25% of the cost depreciated each year. Using double declining balance or 200%, which is the most common, would mean that depreciation expense in the first year would be twice that or 50%. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%. Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using double declining balance the the depreciation depreciation would would be calculated calculated as follows: follows: factor = 2 * (1/4) = 0.50 Year
1 2 3 4
Depreciable Basis 3,217.89 1,608.94 804.48 402.24
Depreciation Depreciation Calculation Expense 3,217.89 * 0.5 1,608.95 1,608.94 * 0.5 804.47 804.48 * 0.5 402.24 402.24 * 0.5 201.12
Accumulated Depreciation 1,608.94 2,413.41 2,815.65 3,016.77
Sum of the Years Digits The first step is to sum the digits or numbers starting with the life and going back to one. For example, an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15 To find the percentage for each year divide the year's digit by the sum. In the example above the percentage would be calculated as follows:
3 Year Year 1 Year Year 2 Year Year 3 Year Year 4 Year Year 5
5 / 15 = 33.34% 33.34% 4 / 15 = 26.67% 26.67% 3 / 15 15 = 20 20 % 2 / 15 15 = 13.33 13.33 % 1/ 15 15 = 6.67% 6.67%
Example: A conference table is purchase for 1,467.89. The expected life is 5 years. Since this is a 5 year asset the yearly factors have been calculated above. Year
1 2 3 4 5
Depreciation Calculation 1,467.89 * 33.34 % 1,467.89 * 26.67 % 1,467.89 * 20 % 1,467.89 * 13.33 % 1,467.89 * 6.67 %
Depreciation Expense 489.40 391.49 293.58 195.67 97.91
Accumulated Depreciation
The amount of a long term asset's cost that has been allocated allocated to Depreciation Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment. Buildings, Buildings, machinery, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely. During each accounting period (year, quarter, month, etc.) a portion of the cost of these assets is being used up. The portion being used up is reported reported as Depreciation Depreciation Expense on the income statement. statement. In effect depreciation is the transfer of a portion of the asset's cost from the balance sheet to the income statement during each year of the asset's life. How to Calculate Depreciation
Deprec Depreciati iation on expense expense is calcula calculated ted utilizi utilizing ng either either a straigh straightt line line deprec depreciati iation on method method or an acceler accelerated ated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset. The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below.
4 Straight Line Depreciation Method
The straight line depreciation method divides the cost by the life. SL = Cost / Life Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the annual depreciation as follows: 487.65 / 5 = 97.53 Each year for 5 years $97.53 would be expensed. Declining Balance Depreciation Method The declining balance depreciation depreciation method uses the depreciable depreciable basis of an asset multiplied by a factor based on the life of the asset. The depreciable basis of the asset is the book value of the fixed asset -- cost less accumulated depreciation. The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator. For example, an asset with a four year life would have 25% of the cost depreciated each year. Using double declining balance or 200%, which is the most common, would mean that depreciation expense in the first year would be twice that or 50%. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%. Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using double declining balance the the depreciation depreciation would would be calculated calculated as follows: follows: factor = 2 * (1/4) = 0.50 Year
1 2 3 4
Depreciable Basis 3,217.89 1,608.94 804.48 402.24
Depreciation Calculation 3,217.89 * 0.5 1,608.94 * 0.5 804.48 * 0.5 402.24 * 0.5
Depreciation Expense 1,608.95 804.47 402.24 201.12
Accumulated Depreciation 1,608.94 2,413.41 2,815.65 3,016.77
Sum of the Years Digits
The first step is to sum the digits or numbers starting with the life and going back to one. For example, an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15 To find the percentage for each year divide the year's digit by the sum. In the example above the percentage would be calculated as follows: Year Year 1 Year Year 2 Year Year 3 Year Year 4 Year Year 5
5 / 15 = 33.34% 33.34% 4 / 15 = 26.67% 26.67% 3 / 15 15 = 20 20 % 2 / 15 15 = 13.33 13.33 % 1/ 15 15 = 6.67% 6.67%
5 Example: A conference table is purchase for 1,467.89. The expected life is 5 years. Since this is a 5 year asset the yearly factors have been calculated above. Year
1 2 3 4 5
Depreciation Calculation 1,467.89 * 33.34 % 1,467.89 * 26.67 % 1,467.89 * 20 % 1,467.89 * 13.33 % 1,467.89 * 6.67 %
Depreciation Expense 489.40 391.49 293.58 195.67 97.91
An example of an Offset Account Pete and Wendy have a $300,000 mortgage and have a 100% offset account with total savings of $30,000.This means that Pete and Wendy owe $300,000 towards the principal amount BUT will only have to pay interest on $270,000 of this as the offset reduces the principle upon by $30,000.
If we see in a balance sheet: Equipment Equipment ..................................... ........................................$120,00 ...$120,000 0 Less: Accumulated depreciation........... 20,000..... 100,000 Accumulated depreciation is the 'contra account,' and 'Equipment,' the related account.
Balance sheet contra accounts: Accumulated depreciation........................... contra-asset Accumulated depletion................................ contra-asset Drawing............. Drawing................................. ....................................... ..................... contra-capital contra-capital Allowance for doubtful accounts................... contra-asset Discount on bonds payable.........................contra-liability
Income statement contra accounts: Sales returns and allowances...................... contra-revenue Sales discounts.......................................... contra-revenue Purchase returns and allowances................. contra-cost Purchase discounts............. discounts................................. ........................ .... contra-cost contra-cost Drawing............. Drawing................................. ....................................... ..................... contra-capital contra-capital Allowance for doubtful accounts................... contra-asset
6 Discount on bonds payable.........................contra-liability
Income statement contra accounts: Sales returns and allowances...................... contra-revenue Sales discounts.......................................... contra-revenue Purchase returns and allowances................. contra-cost Purchase discounts............. discounts................................. ........................ .... contra-cost contra-cost
Tangible fixed assets and depreciation depreciation
Leasehold land is stated at cost. Aircraft fleet and other equipment are stated at revalued amounts and subsequent capitalization of exchange differences and certain overhauling/modification costs less accumulated depreciation. Other fixed assets are stated at cost less accumulated depreciation. The PIA calculate Depreciation by using the straight line method on the basis of Realization principle to write off the cost or revalued amount of assets over their expected useful lives. Remaining useful lives of significant assets are reviewed periodically and change in estimates arising from such review is accounted for in current and future years. The rates of depreciation are stated in note 16. According According to GAAP (Generally Accepted Accounting Principles) realization Principle mean the principle which show the real value of fixed Asset that how portion is being consumed and how much remaining. In case of aircraft fleet, depreciation is calculated on each aircraft after considering 10 percent of the cost including the related net exchange differences of major repairs as the residual value at the expiry of their operational lives. For assets other than aircraft fleet, full year's depreciation is charged on additions during first six months, and on additions during the second half of the year, six months' depreciation is charged. No depreciation is charged on assets and spares disposed disposed off during the year. Proportionate Proportionate depreciation on aircraft fleet is charged charged from the date of acquisition.
7 Gains and losses on disposal of fixed assets are included in income. Major Major repai repairs rs and and renew renewals als incur incurre red d on full fully y depre depreci ciate ated d aircr aircraf aft, t, cost costss incur incurre red d on upg upgra rada dati tion on of aircraft/engines and exchange differences capitalized are depreciated on remaining estimated useful lives of such assets. Other repairs and maintenance are charged to income as and when incurred. So the some of the main financial statements of the PIA are following.
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