The fixed asset lifecycle is the asset lifecycle seen from the books rather than from the storeroom. It begins when an item is capitalised, which is the decision that it is a fixed asset with a cost and a life rather than an expense; it continues through the years of depreciation, with the occasional impairment or write-off; and it ends with a disposal that closes the line with a gain or a loss. For the bookkeeper or owner of a small organisation, the lifecycle is the reason the fixed asset register has to carry more than a description: every stage is a number the balance sheet and the year-end report depend on. This page sets out the stages in bookkeeping terms, with the arithmetic the free fixed asset register worksheet on this site performs on one line.
Capitalisation: the threshold decides what is a fixed asset at all
Not everything bought is a fixed asset. The organisation sets a capitalisation threshold with its accountant, and items below it are expensed in the year they are bought; items above it, with a useful life of more than one year, go on the register with a cost, a salvage value and a life. GFOA's best practice for governments recommends a threshold of no less than $5,000 for any individual item; a small company often sets a lower one. The threshold is a policy, and the register's job is to apply it consistently and record which items were capitalised and which were not.
Depreciation: the cost is spread over the life, period by period
From the in-service date the cost less the salvage value is spread over the useful life. Straight-line spreads it evenly: a $18,500 machine with $1,500 salvage over five years depreciates $3,400 a year. Double declining balance front-loads it at twice the straight-line rate on the falling book value: $7,400 in year one, $4,440 in year two. The method is a bookkeeping choice; the worksheet on this site shows both so the choice is visible. The book value at any date is the cost less the accumulated depreciation to that date, and that is the figure the balance sheet carries.
Impairment and write-off: the life or the value changes before the end
Sometimes an asset loses value faster than the schedule: it is damaged, superseded or no longer used. The register records an impairment, which lowers the book value in one step, or a write-off, which takes it to salvage value and stops the depreciation. Both are rows with a date and a reason against the line, not edits of the original cost. The original cost never changes; it is the one figure on the line that is a fact rather than an estimate.
Disposal: the line closes and the gain or loss is the last number
When the asset is sold, scrapped or donated, the line closes on that date with the proceeds. The gain or loss is the proceeds less the book value on the disposal date: the $18,500 machine sold after two years for $12,000 against an $11,700 straight-line book value shows a $300 gain. The closed line stays on the register so the year-end fixed asset report can show additions, disposals and the depreciation charge for the year, which is what the accountant builds the accounts from.
Questions people ask about fixed asset lifecycle
When does the fixed asset lifecycle start?
At capitalisation, which is the decision that the item is a fixed asset above the organisation's threshold with a useful life of more than one year. The depreciation starts on the in-service date, which may be later than the purchase date.
What is the difference between depreciation and impairment?
Depreciation is the planned spreading of the cost over the life. Impairment is an unplanned reduction in book value when the asset is worth less than the register says, recorded once with a date and a reason.
Do fully depreciated assets leave the register?
No. They stay at their salvage value, still owned, still counted, until they are disposed of. Removing them because they are worth nothing on the books is how organisations lose track of what they own.
Is the fixed asset lifecycle the same for a school or a church?
The stages are the same. What differs is the threshold and the reporting: a school district reports capital assets under GASB 34, and an organisation holding federally funded equipment keeps the records 2 CFR 200.313 lists and counts them at least every two years.
Sources
- GFOA best practice, Establishing Appropriate Capitalization Thresholds for Capital Assets
- SEC, Beginners' Guide to Financial Statements: how depreciation moves cost from the balance sheet to the income statement
- 2 CFR 200.1, Definitions: equipment, capital assets and acquisition cost as the Uniform Guidance defines them