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How does depreciation work in Fixed Assets Management?

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Depending upon the type of fixed assets you own – and upon your specific company policy – it’s likely that you’ll capitalize many of your fixed assets. Many short-term business expenses are immediately written off as expenses. If an item is capitalized either by choice or by law, however, the expense of that asset is actually viewed as a business asset, and is then written off over a period of years through depreciation. Because of their expense and durability, many fixed assets are capitalized, so it’s necessary to possess at least a basic understanding of depreciation.

In its simplest expression, depreciation involves the portioning of the cost of an asset over the estimated useful life of that asset. The cost of the asset includes the purchase price and any other indirect costs of the asset, such as shipment and installation. It’s also important to note that, for depreciation purposes, the useful life of an asset is not necessarily an estimation of its ability to perform, because the asset may be in fine working condition yet no longer have value to the company because of technological advances. Useful life thus refers to the estimated time in which the asset will prove beneficial to the company. Straight-line depreciation is the most common form of fixed asset depreciation. Using that method, depreciation is allocated evenly among each of the years of the useful life of the asset. In the reducing-balance method, high depreciation rates are used during the early, most useful years of an assets life, but those rates decline as the asset ages. The total amount of depreciation is the same regardless of method, so your choice of depreciation styles will result from personal preferences and the type of asset in question.

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