# How much do you depreciate an asset and when?

Author:
Harold Averkamp, CPA, MBA

## Definition of How and When to Depreciate an Asset

Depreciation begins when you place an asset in service and it ends when you take an asset out of service or when you have expensed its cost (minus any salvage value), whichever comes first.

The amount of depreciation over the asset’s useful life is the asset’s cost minus an estimated salvage value at the end of the useful life. The result of this calculation is sometimes referred to as the asset’s depreciable cost.

For a company’s financial statements the asset’s depreciable cost (based on the estimated salvage value) is divided by the estimated years of useful life to arrive at a consistent annual amount to be debited to Depreciation Expense and is credited to Accumulated Depreciation. This method is know as the straight-line depreciation.

For U.S. income taxes the Internal Revenue Service has specified the number of years that various assets will be useful and it assumes there will be no salvage value. The IRS also allows a company’s tax return to deduct larger amounts of depreciation in the earlier years and smaller deductions in the later years of the assets’ lives. This accelerated depreciation can be used on the tax returns at the same time that straight-line depreciation is used on the company’s financial statements.

## Example of How and When to Depreciate an Asset

Assume that a U.S. corporation purchases new equipment at a cost of \$700,000 and expects the equipment to have \$0 salvage value at the end of its 10-year useful life. The company’s annual depreciation for a full accounting year will be \$70,000 (\$700,000 – \$0 salvage value = \$700,000/10 years = \$70,000). The depreciation begins when the asset is put into service.

For income tax purposes the depreciation depends on the tax regulations in the year that the asset is put into service. It is possible there is some “bonus” depreciation, a required 7-year life, an accelerated method assumed, etc. These tax regulations affect when the total amount of \$700,000 in depreciation is taken. In other words, the total amount of depreciation over the life of the asset is \$700,000 on the financial statements and on the tax return. The difference is when the \$700,000 is reported as depreciation expense. Accountants refer to this as a timing difference.

Join PRO to Track Progress
Must-Watch Video

#### Advance Your Accounting and Bookkeeping Career

• Perform better at your job
• Get hired for a new position
• Understand your small business
• Pass your accounting class

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

#### PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

#### About the Author

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

#### Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

• Debits and Credits
• Adjusting Entries
• Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Working Capital and Liquidity
• Financial Ratios
• Bank Reconciliation
• Payroll Accounting
##### Badges and Points
• Work towards and earn 30 badges
• Earn points as you work towards completing our course