Why assets are depreciated
When you buy a piece of equipment, a vehicle, or other long-lived asset, that purchase benefits the business over multiple years. Accounting principle requires that you match the cost of an asset to the periods it benefits - so rather than expensing the full cost in the year of purchase, you depreciate it over its expected useful life. A $12,000 computer used for 3 years generates $4,000 of depreciation expense per year.
When you buy a $30,000 piece of equipment that will last 5 years, recording it all as an expense in month one would badly distort your P&L. One month shows a massive loss, then the equipment appears to cost nothing for the next 59 months even though it is producing value throughout. Depreciation spreads the cost over the useful life so each period shows its fair share of the asset's cost.
The other side of depreciation is balance sheet accuracy. Without depreciation, your balance sheet would show the original purchase price of assets you bought years ago at current values - equipment from 2018 showing as $30K in 2026. Depreciation adjusts the book value down over time so the balance sheet reflects what the assets are actually worth.
Common depreciation methods
Straight-line depreciation spreads the cost evenly over the useful life - the most common method for financial reporting. Accelerated methods like double-declining balance expense more in earlier years, which is sometimes used for tax purposes. For financial reporting, straight-line is standard for most assets.
Straight-line depreciation is the simplest and most common method. Take the cost, subtract any expected salvage value, divide by useful life in months. A $30K asset with $0 salvage and 5-year life depreciates at $500 per month for 60 months. Straight-line is what most private companies use because it matches GAAP and is easy to explain.
Accelerated methods (declining balance, MACRS) depreciate more in early years and less in later years. These are common for tax purposes because they shift tax deductions earlier, but the tax depreciation schedule is usually separate from the book depreciation schedule. Many companies maintain two sets of records - book depreciation for financial statements, tax depreciation for IRS reporting.
What counts as a fixed asset
Not every purchase is a fixed asset. The IRS has a de minimis threshold - currently $2,500 for most businesses - below which items can be expensed immediately rather than capitalised and depreciated. Above that threshold, items with a useful life of more than one year are typically capitalised. Common fixed assets include computers, equipment, furniture, leasehold improvements, and vehicles.
Fixed asset thresholds matter. Many companies capitalize everything over a dollar threshold (commonly $2,500 or $5,000). Below that, it goes straight to expense as "small tools" or similar. The threshold needs to be consistent and documented. Otherwise, someone might expense a $4,000 laptop one month and capitalize a similar $4,500 laptop the next month, which distorts comparability.
What counts as a fixed asset: equipment, furniture, vehicles, computers, leasehold improvements, capitalized software. What does NOT count: ongoing software subscriptions (those are period expenses), consumable supplies, repairs and maintenance (unless they extend useful life significantly). Getting this classification right matters because miscategorized items show up wrong on both P&L and balance sheet.
The fixed asset register
A fixed asset register is a list of every capitalised asset, its purchase cost, its depreciation method, its accumulated depreciation to date, and its book value. This register should be maintained and reconciled to your balance sheet regularly. Without it, it's impossible to know whether your fixed asset accounting is accurate.
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A fixed asset register tracks each asset individually: description, purchase date, cost, useful life, depreciation method, accumulated depreciation, and net book value. Most accounting systems have a fixed asset module or can be configured with one. For smaller companies, a spreadsheet works, but it needs to tie to the general ledger balances every month.
Physical verification should happen at least annually. Walk through the office, match equipment to the register, note anything missing (theft, disposal, retirement) or anything present but not on the register (often gifts or forgotten purchases). Assets that were retired or disposed of but still sit on the register inflate the balance sheet. Catching this once a year prevents multi-year accumulation of ghost assets.
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