Depreciation of Fixed Assets: Ignore it, and it’ll Cost You

It can be forgotten among all of the other priorities you’re attending to with your business, but depreciation of fixed assets is something you can’t ignore. Perhaps the most compelling reason to stay on top of your asset values is that depreciation of fixed assets has a direct impact on your bottom line. In a nutshell, depreciation refers to the reduction in the cost of a fixed asset; for example, office furniture, monitors, laptops, printers, phones, land, office space, and company vehicles. Over time, fixed assets lose value, even as they continue to help generate income for a company. Each year, companies should expense a percentage of the cost of each asset.

Depreciation of fixed assets involves several considerations: each asset’s useful life, its salvage value, obsolescence, and depreciation method.

The useful life is calculated based on how long the company expects the asset to be operational. Depending upon the asset being considered, eventually, it will slow down and/or require replacement, and therefore won’t be of service anymore. At that point, it will likely be phased out of the company’s inventory and/or disposed of. The item’s depreciation is calculated over the course of its useful life.

Salvage value refers to the amount for which a company may be able to sell an asset being disposed of. That’s a greatly reduced figure, of course. Straight-line depreciation is calculated by subtracting the asset’s salvage value from its original cost. If the salvage value is negligible, the company may choose not to report depreciation.

Obsolescence refers to the time when an asset effectively becomes obsolete and must be replaced.

Depreciation method can take various forms. An accelerated depreciation method recognizes more depreciation early in the useful life of the asset, and defers your income tax recognition until a later time. Straight-line or steady depreciation, on the other hand, is usually easier to compute. As mentioned above, it’s calculated by subtracting the salvage value from the asset purchase price, then dividing that number by the useful life of the asset.

At the end of an asset’s useful life, the only cost that remains is its salvage value.

Needless to say, the depreciation of fixed assets can mean a lot of moving parts to track. The opportunity for error is significant – especially if you’re relying on a manual system to handle this task. When it comes to financial reporting and your tax liability, mistakes can be costly. If you want peace of mind, a largely automated system is your best bet.

Asset Panda, the most powerful mobile asset tracking and management platform in the world, allows you to configure your depreciation settings and track depreciation of fixed assets accurately and easily. Our free mobile iOS and Android apps are designed to be incredibly intuitive and user-friendly and rely on the straight-line depreciation method. Following client feedback, Asset Panda also introduced an appreciation feature so that users can track the inflation of their fixed assets on a monthly, quarterly or annual basis. With Asset Panda, your information is secure and in real time – and it’s as near as the palm of your hand. You only need your smartphone or tablet to use the app; there’s no need for any additional hardware, software or expensive software licenses. You may also add as many users as you’d like at no additional fee. Asset Panda is completely customizable and flexible, giving you the means to track the entire lifecycle of your fixed assets any way you want. No special training is needed to get up to speed, but if you have questions, Asset Panda’s world-class customer support is at your fingertips.

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Courtney Roush

Courtney Roush is a freelance writer, editor, and communications strategist with 25 years of experience. Her favorite discipline is crisis communications – and it’s a highly relevant one in our present times.

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