Re: On accounting and engineering.(Slightly offtopic)

[Adrian Hoe <mailbox@*nospam*adrianhoe.com>]

Darren New wrote:

> Adrian Hoe wrote:
> 
>>The problem with software is that when you are still using it, it has
>>value on your book. The moment you stop using it, the value becomes null.
>>
> 
> Which, as I said, just means you don't understand what accountants use
> depreciation for.
> 
> Depreciation doesn't keep track of how much remaining value the software
> has. Depreciation keeps track of how much of the money you spent to buy the
> software was spent to make the money you made using that software this year.
> 
> If you spend $10K on a package that you use for 10 years, you depreciate it
> $1K per year (in simple formulations), not because after 3 years the
> software is only worth $7K. That's irrelevant. What's relevant is that if
> you depreciated the entire package in the first year, you'd have an
> inbalance in your profit vs expense calculations. Not all $10K of that
> software purchase was spent in order for you to make the money from it the
> first year. Depreciation has nothing, nada, zippo, zilch to do with how much
> the thing you bought is still worth, and everything to do with how long you
> use it.


When you purchase a pc and a software package, you pay an amount of 
money say ($20k, $10k for hardwrae and 10k for software). The 
accountant will credit the bank/cash account but 20K does not go into 
expenses. This is not expenses. This is an asset. Credit the asset. 
Depreciation tells you how much residue value of your asset at the 
time. Hardware usually has 40% of depreciation so that the equipment 
can be fully depreciated on the book in 2.5 years. This is due to how 
fast the computer technology advances. Almost every 9-18 months will 
have new products coming. So, you will have something like:

1st year hardware = $10K
2nd year hardware = $6K
3rd year hardware = $2K
3.5rd year hardware = $0


This issue is reflected diffrently in a developer and end-user company.

For a developer, say you buy an Ada83 compiler in 1992 for $10K. But 
in 1995, Ada95 becomes the new standard and you wish to migrate to 
Ada95 and port all applications to Ada95. The moment you acquire Ada95 
compiler and stop using Ada83 in 1995, the asset value (Ada83 
compiler) becomes zero immediately. Why? Because you write it off from 
your book. This becomes an expenses. Credit Asset and debit expenses 
or depreciation. Within 1992 and a day before you acquire Ada95 in 
1995, Ada83 compiler was your asset and it was registered in your 
book. It is a different case for your Sun Workstation SPARC5 (for 
example). You purchased it in 1992 at a price of $10K (for example). 
In mid of 1995 (2.5 years), it has been fully depreciated. But if you 
continue to use it, it is still your asset and the accountant will 
re-value it at a much lower rate. This is true in the case of Ada83 
compiler if you still continue to use it even after you acquire Ada95 
compiler, but the value stays (because there is no dpreciation).


> You don't think accountants should tell engineers what software to use. Why
> would you, as an engineer, think you should tell accountants how to control
> the spending of money?
> 
> 



-- 
type Dmitry is new Adrian;           -- Adrian Hoe
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