How to model the purchase of equipment in sherloc

1. Confirm it’s a long-term asset

Check the purchase against your capitalisation policy: equipment you’ll use for more than a year (machinery, vehicles, fixtures) is capitalised as a fixed asset, rather than expensed straight away.

Example: a £25,000 piece of machinery, expected to be used for 5 years.

2. Add the cost to your balance sheet

Select Create assumption. In the Create Assumption drawer, give the assumption a name, pick the Balance Sheet sheet, and choose the line that holds your equipment at cost. Line names vary between businesses.

Under When should the assumption happen, choose Date range, from the month you buy it (From) to the last month of your forecast (To). Under What the assumption is modelling, pick Increase / decrease with £ Fixed amount and enter the purchase cost, then select Add assumption.

A date range keeps the asset on your balance sheet in every month through to the end of the forecast. Your cash at bank falls by the purchase cost automatically, so you don’t need a second assumption for it.

3. Work out your depreciation charge with your accountant

Different equipment can depreciate at different rates depending on its type and your accounting policy, so this isn’t something sherloc can advise on. Ask your accountant for the rate (or rates) to use, and whether it’s a straight-line or reducing-balance method. If you’d rather keep things simple, ask whether a single blanket rate across all your equipment is reasonable.

Example: your accountant might advise 20% straight-line for computer equipment, and 10% reducing balance for machinery. On £25,000 over 5 years, straight line comes to about £417 a month.

4. Add the depreciation as two assumptions

Profit and loss charge. Select Create assumption, pick the Profit And Loss sheet and your depreciation (or amortisation) line, such as Depreciation Expense. Choose All months, then Increase / decrease with £ Fixed amount, and enter your monthly depreciation charge. This gives the same charge in every month.

Balance sheet reduction. Select Create assumption again, pick the Balance Sheet sheet and whichever line reflects the reduced value of this asset in your accounts, such as a Less Accumulated Depreciation line. Choose All months, then Consecutive monthly change, set Change by to £ Fixed amount, and under Change each month enter the same monthly figure as a negative number. The balance then builds up by that amount each month.

If you buy part-way through the forecast, you may want to use Date range from the purchase month to the last month of the forecast on both assumptions, so depreciation doesn’t start before you buy. A date range that ends earlier returns the figure to its starting level, which would leave your cash lower than intended.

Your cash at bank moves automatically with both assumptions; together, the two leave your cash where it was.

5. Check the numbers

Look at your balance sheet to confirm your asset balance has increased in the right month and stays up, and that the accumulated depreciation grows each month. Look at your profit and loss to confirm depreciation is being charged at the same amount each month.