Composite depreciation
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2012 by Marty J.Schmidt. Revised 29 January 2012.
The Meaning of Composite Depreciation Explained With an Example
Composite depreciation is a method of depreciation in which a group of related assets is depreciated as a whole rather than individually. This can reduce unnecessary record keeping and reporting and might be used, for example, in depreciating a company’s office furniture, or office equipment.
Composite depreciation for one company's office equipment, for example, might include these assets:
• Laptop computers
• Copiers & Fax Machines
• Printers
• Telephone Switching Equipment
Each category, moreover, includes a number of machines or devices. Calculating and reporting depreciation for all devices and machines individually could become a complex and tedious task for the accountant as well as the managers, owners, and auditors who read accounting reports. Composite depreciation for the whole set of assets, "office equipment," gives an accounting result that is more easily produced and understood.
Compound depreciation of this company's office equipment begins with a summary of depreciation information for each of the asset classes:
| Office Equipment | Orignal Cost | Salvage Value | Depreciable Cost | Depreciable LIife | SL Deprec per Year |
|---|---|---|---|---|---|
| Computers | $65,000 | $5,000 | $60,000 | 3 years | $20,000 |
| Copy/Fax Mach | $12,000 | $2,000 | $10,000 | 6 years | $2,000 |
| Printers | $6,000 | $1,000 | $5,000 | 5 years | $1,000 |
| Tel Switch Eq | $93,000 | $3,000 | $90,000 | 9 years | $10,000 |
| Total | $176,000 | $11,000 | $165,000 | — | $33,000 |
Notice that composite depreciation will base calculations for all asset classes in the office equipment group on the straight line (SL) method. From these figures, a composite rate and a composite life are calculated:
Composite rate = Total depreciation per year / Total original cost
= $33,000 / $176,000
= 0.188
Composite life = Total depreciable cost / Total depreciation per year
= $165,000 / $$33,000
= 5.0
Composite depreciation expense each year equals the composite depreciation rate times the total historical cost. Here, assuming no assets are added or removed from the asset set, composite depreciation for each of 5 reporting years would be:
Composite Depreciation Expense = (0.188 ) ($176,000) = $33,088
This expense will contribute to the income statement reported depreciation expense (thereby lowering profits by that amount), and it will be added to the balance sheet accumluated depreciation account for these assets. The two transactions involved are a debit to the depreciation expense account and a credit to the accumulated depreciation account (accumulated depreciation is a contra-asset account).
Of course it is very likely that some assets will in fact removed (sold) during the 5 year period. In the case when an asset is sold, there is a debit to the cash account of the original purchase price (addition to the cash account), and a credit to the asset account (subtraction of the same amount from the asset account). Composite depreciation does not allow recognition of any gains or losses on the sale of assets.
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