How Much Does a Fixed Asset Depreciate?

Many organizations rely on fixed assets–these tangible items like office space, furniture, and computer equipment are all vital for effective business operations. Since these assets are designed for long-term use, they face inevitable wear and tear and lose value over time. So, when does a fixed asset depreciate, and at what rate? 

Whether you’re managing office furniture or machinery, the rate of depreciation on fixed assets differs from item to item. Tracking the full lifecycle of your fixed assets–including their depreciated value–is essential for organizations to maintain accurate balance sheets and comply with financial and regulatory standards.

As fixed assets age, they face a gradual loss in value known as depreciation. Tracking the is essential for organizations to maintain accurate balance sheets and comply with financial and regulatory standards. However, it’s important to note that not all fixed assets depreciate. If your job is to accurately track fixed assets for your organization, you’ll first need to determine which of its assets are subject to depreciation tracking, at what rate, and why. 

First of All, Does a Fixed Asset Depreciate?

From IT devices to machinery, nearly all fixed assets lose value over time. In general, if a fixed asset is not easily liquidated, has a useful life of more than one year, and is used for the express purpose of building revenue, it can depreciate. 

With such a broad range of fixed assets, you may wonder, “When does a fixed asset depreciate?” The IRS publishes specific guidelines for organizations to follow including the types of property that can be depreciated and the maximum number of years that an asset can be depreciated for tax purposes. For example, real estate or property has a depreciation lifecycle of 27.5 years, while non-property fixed assets like vehicles and computers have a lifespan of 5 years. 

For reference, here is a list of common fixed assets that can be depreciated:

• Buildings and office space 
• Cars and other vehicles
• Property, plant, and equipment (PP&E)
• Furniture
• Machinery
• Computers and software

In terms of fixed assets that do not depreciate, land is the most common example. Since land is expected to grow in value over time–not decline–it does not experience depreciation.

Strategies to Track How Much an Asset Depreciates

There are a variety of methods for tracking fixed asset depreciation, so it’s important to determine which strategy suits your organization best. The most common methods for tracking fixed asset depreciation include: 

1. Straight-Line Method

Straight-line depreciation is the most common method because it’s the most straightforward. With this method, you deduct the same amount of value depreciation each year over the course of an asset’s useful life. You can calculate the depreciation expense by the asset’s upfront cost minus its salvage value, divided by its useful life. Since the calculation is the same each year, this simple method is recommended for small businesses. 

2. Declining Balance Method

Unlike the straight-line method, this distributes an asset’s depreciation unevenly throughout its useful life. You apply the same depreciation rate to the adjusted (lower) value of the asset each year. The declining balance method is most helpful for assets that require a large expense up front and then lose value quickly, like vehicles and computers, since it allows you to write off a larger amount in early years. 

3. Units of Production Method

With this method, you will calculate an asset’s depreciation by the total number of units that it has produced or the total number of hours that it has been in use. With this method, the depreciation rate will be higher in years that the asset contributes more to your organization’s revenue. This method is most often used in the manufacturing field with assets like machinery and equipment. 

4. Sum of the Years Digits Method

Sometimes called SYD for short, this is an accelerated method for tracking the rate of depreciation on fixed assets. Like the declining balance method, it acknowledges an asset’s higher value in the earlier years. Calculate it by adding together the years the asset is expected to be useful. If an asset is expected to last for 3 years, it would be 3 + 2 + 1 to get a total of 6. Then, each digit is divided by the sum to determine the yearly depreciation percentage, starting with the highest number in the first year. 

The Importance of Tracking Fixed Asset Depreciation

Why take the time to go through this complicated process? Tracking the depreciation of your organization’s fixed assets has a number of benefits, including:

• Understand the value of your organization’s assets. When you track depreciation, you are keeping a record of how much an asset cost to purchase and how much it’s worth now. If you are using the units of production method, you can also calculate how much revenue an asset has delivered to your bottom line. From there, you can make informed decisions about whether an asset is worth keeping or is ready to be replaced. 
• Claim tax deductions. The loss of value over a fixed asset’s lifespan is tax deductible. When an asset gets older, the depreciation it accrues can be increasingly written off, lowering your organization’s total income tax. If you claim tax deductions on assets, be sure to keep all original purchase receipts so you can prove the purchase amount in case of an IRS audit.
  
• Achieve regulatory or grant compliance. For organizations following the Generally Accepted Accounting Principles (GAAP), it’s essential to maintain an accurate balance sheet with up-to-date asset values. Beyond attaining regulatory compliance, depreciation tracking is also crucial for certain organizations that use grants to purchase their items, such as public schools. When schools can demonstrate what they’ve purchased with grant money and its current value, they can achieve compliance and secure future funding.

The Simplest Way to Track the Rate of Depreciation for Fixed Assets

While tracking the depreciation rate on fixed assets can seem like a daunting task, it doesn’t need to be. Now that you can answer the questions, “How, when, and why do fixed assets depreciate?” all you need is the right depreciation tracking tool. With Asset Panda’s depreciation solution, your organization can automate depreciation calculations and maintain accurate financial records.

Unlike a basic Excel spreadsheet, Asset Panda creates a single source of truth for all your assets in one real-time platform. Gain visibility into the current status and value of your items along with their full lifecycle history for seamless tracking and reporting. Automatically calculate each unique asset’s depreciation rate on a monthly, quarterly, or annual basis to ensure your financial records stay up to date.

Ready to switch to a better software? Request your personalized demo today and discover how Asset Panda can meet your unique needs.