Definitions commonly associated with the Fixed Assets Module:

ACRS (Accelerated Cost Recovery System) applies to property that was placed in service prior to 1987. It is a method of calculating the Depreciation of assets for tax purposes. This is a straight-line method of calculation that looks at the value of the asset to determine which class it belongs to. These assets would be set up as straight lines and use the life determined by the user.
 
AMT (Alternative Minimum Tax) uses a combination of 150 declining balances and a straight-line method, which results in a slower rate of Depreciation than the standard MACRS (200 declining balances, 150 declining balances, and straight lines). AMT is used for tax purposes. The purpose of AMT is to slow the Depreciation rate, spreading out the costs over a more extended period of time.

Accumulated Depreciation is the amount of Depreciation that has already been recorded for an asset. This is typically a contra-asset account on the balance sheet that determines the net book value of an asset. Also known as the remaining value of an asset (cost – accumulated depreciation = net book value)

Alternative Depreciation System (ADS): This system uses specified lives and the straight-line method for depreciating an asset. When specified by the taxpayer, it may be used in place of the regular Depreciation (MACRS).

Asset – A property owned by a company that has a value and could be utilized to satisfy debt requirements/obligations. Assets are recorded in the Asset section of the Balance Sheet.

Depreciation is a reduction in the value of an asset with the passage of time due to wear and tear.

Half-Year Convention (Mid-Year Convention) - This is the convention utilized for most assets (other than real estate). The half-year convention uses July 1 as the date to start computing depreciation, regardless of the date the asset was actually placed in service. This means that in the first and last years of Depreciation, the asset will have ½ of the allowable Depreciation. If an asset is placed in service and sold in the same year, then there will not be any depreciation for that asset.
 
MACRS (Modified Accelerated Cost Recovery System) is the current tax depreciation system in the United States. Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for Depreciation. In Pak Accounting, entries can be booked monthly, quarterly, half-year, or yearly. MACRS utilizes declining balance or straight-line methods depending on the IRS class code.
 
MACRS 150 (150% declining balance) – This method calculates depreciation, in which the asset has 150% depreciation in the first year of life compared to the straight-line calculation. This is the most common calculation for the AMT book. See table below for an example utilizing the half-year convention:

Formula first year = Cost x (1/life) x 150% x convention (see below):

Depreciation in subsequent years = (cost – accumulated depreciation) x (1/life) x 150%

MACRS 200 (double declining balance) – This is a method for calculating Depreciation in which the asset has double the straight-line Depreciation in the year that it is placed in service. Depending on the life, the percentage decreases each year until it is equal to a straight line. Once it comes in line with a straight line, the remaining Depreciation is calculated based on the straight-line method of Depreciation. Example of MACRS table for 200 double declining with a half-year convention (standard convention):

Formula first year = Cost x (1/life) x 200% x convention (see below):

Depreciation in subsequent years = (cost – accumulated depreciation) x (1/life) x 200%

Mid-Month Convention - This is the convention utilized for real estate transactions. Mid-month convention means that the Depreciation will start calculating on the 15th (or middle day of the month) regardless of the date that the asset was placed into service. The standard monthly depreciation rate would be half in the first and last months of an asset's life.

The following are the decimals that should be utilized in the calculation of Depreciation depending on whether it is the first year or the year the asset is disposed of if the disposal occurs prior to the asset being fully depreciated (if the asset is placed in service and disposed of/sold in the same year, then, there is zero Depreciation calculated on the asset):

NOTE: These are the decimals for the year. The Depreciation will then be calculated monthly.

Mid-Quarter Convention - This convention is used when a company places more than 40% of its new assets in service in the last quarter of the year. When this happens, ALL assets (non-real estate assets) must use the mid-quarter convention. This means that an asset is considered to have been placed in service in the middle of the quarter in which it was placed in service. Percentages are used for the asset's depreciation based on the quarter in which it was placed in service.

The following are the decimals that should be utilized in the calculation of Depreciation depending on whether it is the first year or the year the asset is disposed of if the disposal occurs prior to the asset being fully depreciated (if the asset is placed in service and disposed of/sold in the same year, then, there is zero Depreciation calculated on the asset):

NOTE: These decimals are for the year. This will then be calculated down to a monthly depreciation.

Monthly Convention - This should only apply to the GL or user-defined books because it is not one of the 3 conventions accepted for tax purposes. The monthly convention allows for a full month of Depreciation in the first month that an asset is placed into service, regardless of the date placed in service.

Short-Year Depreciation – This is tied to a Short Tax Year. A company may have a short tax year during the first year of business to keep the tax years the same as a calendar year vs. having a fiscal year-end. Pak Accounting supports this type of Short Year Calculation. An existing business may have a short tax year if it goes from a fiscal year to a calendar year or vice versa. The system will validate that the Short Year Depreciation (1st day of business) is not more recent than the oldest asset in the system. There is a message that pops up when adding a Short Year Depreciation (1st day of business) date since this will prompt a recalculation of all the assets that were placed in service during that first year: