Fixed asset depreciation is the bookkeeping that spreads the cost of a fixed asset over the years it is used, so that each year's accounts carry a share of the cost as an expense and the balance sheet carries what is left as the asset's book value. For the owner or bookkeeper of a small organisation, the whole subject reduces to four inputs on every register line and two methods worked from them. This page explains the inputs, works the two methods on one asset, says what the book value does and does not mean, and sets out what the register keeps so the depreciation runs each period without being rebuilt. It is the arithmetic of the books; the depreciation a tax return may claim is a separate question for your preparer.
The four inputs on every line
The cost, which is what it took to bring the asset into service, including delivery and installation. The salvage value, which is what the organisation expects to get for it at the end, and which is often zero. The useful life in years, which is how long the organisation expects to use it rather than how long it might last. And the in-service date, which is when the depreciation starts. The IRS's Publication 946 sets out the tests property meets before it is depreciated at all, including a determinable useful life of more than one year; the register applies the organisation's own life within that.
Straight-line: the same charge every year
The depreciable amount is the cost less the salvage value, and it is divided evenly over the life. A $18,500 machine with a $1,500 salvage value and a five-year life charges $3,400 a year, or $283.33 a month, and its book value falls from $18,500 to $1,500 in five equal steps. Straight-line is the method most small organisations use for most classes because it is even, easy to explain and what the accountant expects; the free fixed asset register worksheet on this site shows it first.
Double declining balance: more in the early years
The rate is twice the straight-line rate, applied to the falling book value: two fifths of the opening book value a year for a five-year life. The same machine charges $7,400 in year one and $4,440 in year two, and the book value cannot fall below the salvage value, so the final year's charge is adjusted. The method suits assets that lose most of their value early, such as computers and vehicles. The worksheet shows both methods on one line so the choice, which is a bookkeeping policy by class, is visible.
What the book value means, and what the register keeps
The book value is the cost less the depreciation charged so far. It is not what the asset would sell for and not what it would cost to replace; those are the insurer's and the buyer's numbers, and the register can hold them beside the book value without confusing them. The register keeps the four inputs, the method, every period's charge, the accumulated depreciation and the book value on each line, plus the events that change them: a transfer, a write-off, a disposal with proceeds and a gain or loss. That is what lets the depreciation run each period rather than be rebuilt each January.
Questions people ask about fixed asset depreciation
What is fixed asset depreciation in one sentence?
Spreading the cost of an asset over the years it is used, so each year's accounts carry a share as an expense and the balance sheet carries the rest as book value.
Which fixed assets are depreciated?
Those above the organisation's capitalisation threshold with a useful life of more than one year. Land is not depreciated. Items below the threshold are expensed when bought and tracked for custody rather than depreciated.
Is depreciation of fixed assets the same for the books and for tax?
Not usually. The books use the organisation's own method and lives; the tax return uses the methods and recovery periods the tax rules allow. This site covers the books; the tax schedule is your preparer's.
What happens to depreciation when an asset is sold?
It stops on the disposal date. The proceeds against the book value on that date give the gain or loss, and the register keeps the closed line so the year's schedule shows the disposal.