Methods of Treating Fixed Asset Depreciation

Sep 04 2015

Since fixed assets are used in the general operation of the business to produce revenue, they are not charged to the P&L but are recorded on the balance sheet; however, fixed asset depreciation is charged to the P&L annually. By gradually depreciating the asset over time and not upon acquisition, the P&L doesn’t take an upfront hit but instead spreads the costs of depreciation over time. This process continues annually until the fixed asset’s Net Book Value is nil at which point, there are no further depreciation charges.

Depreciation can be treated in many different ways: Straight-Line depreciation, Sum-of-the-Year’s-Digits, and Declining Balance. However, the total amount of depreciation over an asset's useful life should be the same regardless of the depreciation method used. The difference is in the timing of the total depreciation. With the Straight-Line method, depreciation is charged evenly and the costs spread over the asset’s life whereas with the Declining Balance method, a higher depreciation cost is taken earlier in the asset’s life. As with the Declining Balance method, a higher depreciation cost is taken in the earlier years of an asset's useful life and less later on but the annual depreciation is calculated using a formula using a series of fractions based on the sum of the asset’s useful life digits to result in the annual depreciation figure.

Real Asset Management’s fixed asset software can handle all methods of depreciation. For more information on our fixed asset depreciation software, contact us at solution@realassetmgt.com.