Companies and freelancers have to record the depreciation in the value of certain assets. This act is called amortization and responds to certain parameters previously delimited by the Administration to avoid fraud of law. Depreciation can be linear or subject to certain legislative changes, as you can see.
The article will explain what linear amortization consists of, how to calculate it and what the methodology consists of. We will also give you examples to know what may be more convenient for the company depending on the specific casuistry.
What is linear amortization?
is understood as the calculation of the depreciation of a given fixed assets constantly over time.
However, this is not the only method that exists and, especially in large companies, it is possible that alternative formulas allowed by the tax legislation of Spain are used.
As a general rule, the Administration, through the Ministry of Finance,publishes annually tables where the maximum amortization periods and the annual percentage to be deducted are established.
Also the amortization of certain goods, being the case of used cars, perhaps, one of the most paradigmatic because the venal value is published every year.
When these situations occur, you can opt for a linear amortization or, instead, calculate the depreciation according to what the tables indicate.
However, it is important to note that not every year the same criteria are applied and that, therefore, it is advisable to be attentive to changes in criteria that may be introduced by the Administration.
A certain economic situation may cause the coefficients to change and, consequently, new scales can be applied. This has a certain logic since the process of technological renewal tends to accelerate and, consequently, the life span of certain goods is shortened.
Linear amortization, then, is a way to avoid these ups and downs and, for companies with a little complex operation, itis the simplest and fastest method.
In addition, it is important to bear in mind that, in this way, differences in criteria with the Tax Agency are avoided, which, on many occasions, lead to economic sanctions.
How to calculate the linear depreciation of a tangible fixed assets?
First of all, it is important to note that to calculate the linear amortization it is convenient to differentiate between what is understood as the acquisition price and the amortizable base,which may differ and, in fact, differ.
When making the calculation, it is based on the amortizable base, not on what has been paid for the fixed assets.
In any case, the calculation of the linear depreciation of fixed assets is positive because it offers security and stability,since every year the same amount will be deducted.
Now, it is also true that some dysfunctions are generated because there are goods that depreciate more the first years of use and others that begin to lose a lot of value from three or four.
For example, a new car can depreciate by 30% in the first three years of life. On the other hand, certain industrial machinery will have a longer depreciation period, since this is measured in terms of productivity.
Linear Amortization Method
The linear depreciation method is extremely easy to calculate and consists of two elements: the depreciable base and the period of years of depreciation.
The result of dividing both magnitudes will give the annual fee to be included. In this way, the company will be able to plan its treasury policy well in advance and avoid unforeseen events.
This is good because, when asking for financing or managing payments,financial institutions value an orderly and predictable accounting.
Therefore, and although depreciation subject to change may offer wider margins, this system is preferable for companies without too much fixed assets available.
The self-employed with few workers do not usually have this problem, unless they have state-of-the-art machinery, as can happen in factories.
Of course, it is possible that there is a rest because it is not usual that everything can be amortized in an exact period of years.
In this case, the amount will be deducted the following year. It is important, however, to check that the amortization is made in accordance with the established annual minimums.
Linear depreciation is the most common way to calculate the depreciation of tangible fixed assets,especially in SMEs. It is important to note that there are other methods, but simplicity and predictability allow a company not to have to worry about variations resulting from the economic or technological context.
In this type of situation, a consultancy for companies can help because, thus, you can choose the formula that best suits your own needs. In this way, peace of mind is gained and the accounting is adapted to what is considered appropriate within the legal possibilities.