Fixed Assets and Depreciation: A Complete Guide

Introduction

Fixed assets—also known as property, plant, and equipment (PP&E)—are long-term tangible assets used in business operations that have a useful life of more than one year. Proper accounting for fixed assets is essential for accurate financial statements, tax compliance, and effective asset management. This guide covers everything you need to know about fixed asset accounting.

Understanding Fixed Assets

What Qualifies as a Fixed Asset?

Criteria:

• Tangible (physical existence)
• Used in operations
• Useful life > 1 year
• Not intended for resale

Types of Fixed Assets

Category	Examples
Land	Buildings, parking lots
Buildings	Offices, warehouses, factories
Equipment	Computers, machinery, vehicles
Furniture	Desks, chairs, fixtures
Vehicles	Trucks, cars, forklifts
Computers	Servers, laptops, network equipment
Leasehold Improvements	Renovations to leased property

Capital vs Revenue Expenditures

Capital Expenditures (CapEx)

Definition: Costs that benefit multiple periods, added to asset value

Examples:

• Purchasing new equipment
• Building improvements
• Major renovations
• Acquisition costs

Accounting Treatment:

• Debited to asset account
• Depreciated over useful life
• Appears on balance sheet

Revenue Expenditures (OpEx)

Definition: Costs that benefit only the current period

Examples:

• Routine repairs and maintenance
• Minor parts replacement
• Cleaning and upkeep
• Operating supplies

Accounting Treatment:

• Expensed immediately
• Debited to expense account
• Appears on income statement

Decision Chart

Is the expenditure intended to extend the useful life
or increase the value of the asset beyond
its original recognition?
                |
         YES   |   NO
                |
       Capital | Revenue
    Expenditure| Expenditure

Cost Basis of Fixed Assets

What Costs to Capitalize?

Purchase Price: Invoice cost minus any discounts

Additional Costs:

• Freight and shipping
• Installation
• Testing and setup
• Legal fees (directly related)
• Sales taxes (non-recoverable)
• Customs and duties

Example: Equipment Purchase

Purchase Price:              $50,000
Freight:                     $2,000
Installation:                 $1,500
Sales Tax (non-recoverable): $3,000
Testing:                       $500
                            ________
Total Cost:                $57,000

This $57,000 becomes the depreciable basis.

Depreciation Methods

Straight-Line Depreciation

Equal depreciation each year:

Depreciation = (Cost - Salvage Value) / Useful Life

Example:

• Cost: $50,000
• Salvage Value: $5,000
• Useful Life: 5 years
• Annual Depreciation: ($50,000 - $5,000) / 5 = $9,000 per year

Year	Beginning Book Value	Depreciation	Ending Book Value
1	$50,000	$9,000	$41,000
2	$41,000	$9,000	$32,000
3	$32,000	$9,000	$23,000
4	$23,000	$9,000	$14,000
5	$14,000	$9,000	$5,000

Declining Balance (Double Declining)

Accelerated method:

Depreciation = Book Value × (2 / Useful Life)

Example (same facts):

Rate = 2 / 5 = 40%

Year 1: $50,000 × 40% = $20,000
Year 2: $30,000 × 40% = $12,000
Year 3: $18,000 × 40% = $7,200
Year 4: $10,800 × 40% = $4,320
Year 5: $6,480 × 40% = $2,592 (switch to straight-line)

Units of Production

Based on usage:

Depreciation = (Cost - Salvage) × (Units This Year / Total Units)

Example:

• Cost: $100,000
• Salvage: $10,000
• Total estimated units: 100,000
• Year 1 production: 25,000 units

Depreciation = ($100,000 - $10,000) × (25,000 / 100,000)
            = $90,000 × 25%
            = $22,500

MACRS (Modified Accelerated Cost Recovery System)

For tax purposes:

• Predefined recovery periods
• Accelerated depreciation tables
• Required for tax reporting
• Different from book depreciation

Common Recovery Periods:

Asset Class	Examples	Recovery Period
3-year	Tractors, livestock	3 years
5-year	Computers, cars	5 years
7-year	Furniture, most equipment	7 years
10-year	Boats, some machinery	10 years
15-year	Buildings improvements	15 years
39-year	Commercial buildings	39 years

Salvage Value

What Is Salvage Value?

The estimated value at the end of the asset’s useful life:

• Trade-in value
• Scrap metal value
• Disposal cost consideration

Considerations

• Can be zero
• Must be reasonably estimated
• Affects annual depreciation
• May be adjusted if estimates change

Recording Depreciation

Journal Entry

Depreciation Expense    $10,000
    Accumulated Depreciation  $10,000

Presentation on Balance Sheet

Equipment               $50,000
Less: Accumulated Depreciation  (20,000)
                              ________
Net Book Value         $30,000

Partial Year Depreciation

When asset is purchased mid-year:

Annual Depreciation × (Months in Service / 12)

Example: Purchased July 1 (6 months):

$9,000 × (6/12) = $4,500 first year

Asset Disposal

Selling an Asset

Step 1: Calculate accumulated depreciation Step 2: Remove asset and accumulated depreciation Step 3: Record cash received Step 4: Recognize gain or loss

Example: Sold equipment for $15,000

Original Cost:     $50,000
Accumulated Depreciation:  $35,000
Net Book Value:    $15,000
Sale Price:        $15,000
                              ________
Gain/Loss:        $0

Journal Entry:

Cash                 $15,000
Accumulated Depreciation $35,000
    Equipment                    $50,000

Trade-In

New asset acquired by trading old:

• May be treated as like-kind exchange
• Gain may be deferred
• Basis of new asset adjusted

Asset Retirement

When asset is scrapped or abandoned:

Loss on Disposal    $20,000
Accumulated Depreciation $30,000
    Equipment                    $50,000

Leasehold Improvements

What Are They?

Improvements to leased property:

• Build-out of office space
• HVAC upgrades
• Flooring, walls, ceilings

Amortization

• Over shorter of useful life or lease term
• Generally 15 years for tax purposes
• May need to include in income over period

Asset Management

Fixed Asset Register

Track each asset:

Field	Information
Asset ID	Unique identifier
Description	Name and details
Category	Type of asset
Location	Where asset is used
Purchase Date	Acquisition date
Cost	Original cost
Salvage Value	Estimated end value
Useful Life	Expected lifespan
Depreciation Method	How depreciated
Accumulated Depreciation	Current depreciation

Physical Controls

• Tag assets with identification numbers
• Conduct periodic physical counts
• Maintain location records
• Document transfers between locations

Disposal Procedures

• Document authorization
• Record disposal properly
• Remove from asset register
• Update depreciation schedules

Tax Considerations

Section 179 Deduction

Immediate expensing for certain property:

• Up to certain limit ($1,160,000 for 2024)
• Can elect to expense rather than depreciate
• Must be used in business
• Annual limits apply

Bonus Depreciation

Additional first-year deduction:

• 100% bonus depreciation (as of 2023)
• Phases down in future years
• Applies to new (not used) property

Section 168(k) Requirements

• Original use must begin with taxpayer
• Property must be new
• Primarily used in US

Impairment

When to Test

When factors indicate book value may not be recoverable:

• Significant decrease in market value
• Change in how asset is used
• Physical damage
• Obsolescence

Measuring Impairment

Impairment Loss = Carrying Amount - Fair Value

Example:

Carrying Amount: $100,000
Fair Value: $70,000
Impairment Loss: $30,000

Journal Entry:

Impairment Loss      $30,000
    Accumulated Depreciation $30,000

Conclusion

Proper fixed asset accounting is essential for:

• Accurate financial statements
• Tax compliance
• Asset management
• Decision making

Key takeaways:

• Distinguish capital from revenue expenditures
• Choose appropriate depreciation method
• Track assets throughout lifecycle
• Document disposals properly
• Consider tax planning opportunities

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Resources

• IRS - Depreciation
• AccountingTools - Fixed Assets
• GAAP Fixed Asset Accounting

Advanced Depreciation Topics

Component Depreciation

Under IFRS (and optionally under GAAP), significant components of an asset with different useful lives are depreciated separately:

Building purchase: $2,000,000
  Structure (40-year life): $1,500,000 → $37,500/year
  Roof (20-year life): $300,000 → $15,000/year
  HVAC system (15-year life): $200,000 → $13,333/year
  Total annual depreciation: $65,833/year

vs. single-component approach: $2,000,000 / 40 years = $50,000/year

Component depreciation is more accurate but more complex to maintain.

Asset Impairment

When an asset’s carrying value exceeds its recoverable amount, an impairment loss must be recognized:

GAAP (ASC 360):

1. Test for recoverability: Is carrying value > undiscounted future cash flows?
2. If yes, measure impairment: Write down to fair value
3. Impairment cannot be reversed

IFRS (IAS 36):

1. Identify indicators of impairment
2. Calculate recoverable amount (higher of fair value less costs to sell OR value in use)
3. Write down to recoverable amount
4. Impairment can be reversed (except goodwill)

Example:

Equipment carrying value: $500,000
Undiscounted future cash flows: $450,000 (below carrying value → impaired)
Fair value: $380,000

Impairment loss: $500,000 - $380,000 = $120,000

Journal entry:
Impairment Loss          $120,000
    Accumulated Impairment        $120,000

Depletion of Natural Resources

Natural resources (oil, gas, minerals, timber) are depleted as they’re extracted:

Depletion Rate = (Cost - Salvage Value) / Estimated Total Units
               = ($10,000,000 - $500,000) / 1,000,000 barrels
               = $9.50 per barrel

Year 1 extraction: 80,000 barrels
Depletion expense: 80,000 × $9.50 = $760,000

Amortization of Intangible Assets

Intangible assets with finite useful lives are amortized:

Intangible Asset	Typical Useful Life	Method
Patents	Legal life (20 years) or shorter	Straight-line
Customer relationships	5–15 years	Straight-line or accelerated
Technology	3–7 years	Straight-line
Trade names	Indefinite (no amortization)	Impairment test only
Goodwill	Indefinite (no amortization)	Impairment test only

Section 179 and Bonus Depreciation (US Tax)

Section 179 (2026):

• Deduct up to $1,220,000 of qualifying equipment in year of purchase
• Phase-out begins at $3,050,000 in total purchases
• Cannot create a loss (limited to business income)

Bonus Depreciation (2026):

• 40% first-year bonus depreciation on qualifying property
• Applies to new and used property
• Can create a loss (unlike Section 179)
• Phasing down: 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027

Combined strategy:

Equipment purchase: $500,000
Section 179 deduction: $500,000 (if under income limit)
Tax savings (at 25% rate): $125,000

Fixed Asset Register Best Practices

A fixed asset register tracks all assets throughout their lifecycle:

Required fields:

• Asset ID and description
• Location and department
• Purchase date and cost
• Vendor and invoice number
• Useful life and salvage value
• Depreciation method
• Accumulated depreciation
• Net book value
• Disposal date and proceeds (when applicable)

Annual procedures:

• Physical verification of all assets
• Review useful life estimates
• Identify fully depreciated assets still in use
• Write off disposed assets
• Assess impairment indicators

Conclusion

Fixed asset accounting requires careful attention to initial recognition, ongoing depreciation, impairment testing, and eventual disposal. Key takeaways:

• Capitalize costs that extend useful life; expense maintenance and repairs
• Choose depreciation method based on asset usage pattern and tax strategy
• Test for impairment when indicators exist
• Maintain a detailed fixed asset register
• Understand the tax implications of Section 179 and bonus depreciation

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Resources

• FASB ASC 360 - Property, Plant, and Equipment — GAAP standards for fixed assets
• IRS - Depreciation and Amortization (Publication 946) — Tax depreciation guidance
• AccountingTools - Fixed Assets — Comprehensive reference
• Investopedia - Depreciation — Clear explanations with examples
• Corporate Finance Institute - Fixed Assets — Professional reference