About Depreciation
In this blog, We’d like to explain how depreciation, including accumulated depreciation, is computed in the game.
First off, what is depreciation?
Depreciation is an accounting method used to allocate the cost of a tangible or physical asset over its useful life. For instance, when you open a store in the game, you incur construction costs upfront for the exterior, interior, and equipment. These costs are recorded as assets on the balance sheet, despite being paid for upfront and captured under investing activities in the cash flow statement. As these assets are consumed over time — through wear and tear, breakage, etc. — we allocate the upfront cost over time in the income statement and balance sheet. This may make you feel discrepancies between net income and actual cash balance in the game, reminding of the need to distinguish between accounting practices and actual cash flows.
In this game, almost all tangible assets are assigned a five-year depreciation period, with a residual value set at 25% of the initial price. For example, if you purchase an espresso machine for $10,000, it will be worth $2,500 after five years. Depreciation cost is recorded weekly, calculated as $7,500 ÷ (52 weeks × 5 years) = $28.85, over the five years.
While in reality, some assets have much longer depreciation periods (e.g., heavy machinery, buildings) and others shorter (e.g., electronic devices, cell phones), the game simplifies this with a uniform five-year period for ease of calculation.
Step by Step Example
Let’s walk through a hypothetical scenario. Below, “week 1” shows the company’s books at the start, with an initial $10,000 in cash and common stock reflected on the balance sheet.
Week 1
In week 2, the company invests $10,000 in equipment. On the balance sheet, this amount is reclassified from cash to property, plant, and equipment (PP&E). This investment is recorded under investing activities in the cash flow statement, with no immediate expense reflected on the income statement.
Week 2
Come week 3, depreciation begins. A $29 reduction is applied to the property’s value, accounted for in the balance sheet under “Accumulated Depreciation (AD).” This reduces the original property value cumulatively in AD, now showing AD = -$29. To balance this, an equivalent deduction is made from retained earnings. The income statement reflects this depreciation as an expense. Given that depreciation does not trigger a cash outflow, it’s excluded from operating activities in the cash flow statement.
Week 3
By week 4, suppose the company earns revenue of $1,000. After subtracting the depreciation expense ($29), the net income is $971. This amount boosts retained earnings on the balance sheet. Meanwhile, the cash flow statement records $1,000 under operating activities, since depreciation does not affect cash flow, leading to an increase in cash on the balance sheet.
Week 4
Thus, at the end of week 4, the balance sheet remains balanced (assets = liabilities + equity), showcasing how depreciation impacts the game’s financials.
Software Development Costs?
An interesting aspect of cash outflow in this game involves mobile app development costs, treated as “capital expenditure (CapEx).” This means the investment is considered an asset, not an immediate expense, and is depreciated over five years. Although IT developer salaries are recorded as salary expenses in the game, it’s worth noting that many real-world high-tech companies actually capitalize such costs as well.
Closing a Store with Property Value
Upon closing a store, you must dispose of properties like tables, chairs, equipment, and interior decorations. In the game, all properties are sold at their residual value, regardless of current market value. Therefore, if you close a store immediately after opening, you must sell the properties at 25% of the initial outlay, recording 75% of the investment as a “restructuring cost” expense. If a store is closed after more than five years, no restructuring cost is incurred, as the properties are fully depreciated.
