Depreciation Explained: How to Handle Fixed Assets in Your Books

Why assets are depreciated

A long-lived asset like equipment or a vehicle earns its keep over several years, so the accounting should spread its cost over those years too. Book a $30,000 machine entirely in the month you buy it and your P&L lies twice: one month shows a huge loss, then the machine looks free for the next 59 months even though it is running the whole time. Depreciation fixes that by charging each period its fair share. A $30,000 machine with a 5-year life carries $6,000 of depreciation a year, so every year that uses it also pays for it.

Depreciation also keeps the balance sheet honest. Left alone, an asset would sit at its original purchase price forever, so a $30K purchase from 2018 would still read $30K in 2026. Depreciation writes the book value down as the asset ages, so the balance sheet shows roughly what you still have, not what you paid.

Common depreciation methods

Straight-line is the method most private companies use, and the math is short: take the cost, subtract any salvage value you expect to recover at the end, and divide by the useful life. A $30K asset with no salvage and a 5-year life runs $500 a month for 60 months, the same charge every period. It matches GAAP, it is easy to explain to a board, and it is what you will use for the vast majority of your assets.

Accelerated methods like declining balance and MACRS load more of the expense into the early years. You mostly see these on the tax side, because pulling deductions forward lowers the tax bill sooner. That is why a lot of companies keep two schedules: book depreciation (usually straight-line) for the financial statements, and tax depreciation for the IRS. The two rarely match, and they are not supposed to.

What counts as a fixed asset

Not every purchase gets capitalised and depreciated. Small stuff gets expensed on the spot. The IRS de minimis rule lets you expense items under $2,500 each right away, and most companies set their own capitalization threshold in that range, commonly $2,500 or $5,000. The number itself matters less than sticking to it: if you expense a $4,000 laptop in March but capitalize a nearly identical $4,500 one in April, your months stop being comparable. Pick a threshold, write it down, and apply it every time.

Above the threshold, anything with a useful life over a year is usually a fixed asset: computers, equipment, furniture, vehicles, leasehold improvements, capitalized software. What does not belong there is easy to miss. Software subscriptions are a monthly expense, not an asset. Consumable supplies get expensed. Repairs and routine maintenance are expenses too, unless the work genuinely extends the asset's life. Miscategorize any of these and it lands wrong on both the P&L and the balance sheet.

The fixed asset register

A fixed asset register is one row per asset, tracking its description, purchase date, cost, useful life, depreciation method, accumulated depreciation to date, and net book value. Most accounting systems have a fixed asset module, and for a smaller company a spreadsheet is fine, but either way the register has to tie out to the general ledger every month. If it does not reconcile to the balance sheet, you have no way of knowing whether the asset numbers are right.

Once a year, verify it physically. Walk the office, match equipment to the register, and flag both directions: things on the register that are no longer there (sold, scrapped, stolen) and things sitting in the room that were never recorded. Retired assets left on the books quietly inflate the balance sheet, and the longer they linger the more ghost assets pile up. An annual walkthrough is what keeps that from happening.