Fixed Asset Depreciation 101: What to Know

Depreciation is a central pillar of financial reporting. It remains a large fixture of organizational transparency across the public and private sectors. 

Fixed asset depreciation shows an asset’s gradual reduction in value over time due to use or obsolescence. 

Organizations across industries, including municipalities, educational institutions, and businesses, rely on depreciation to maintain accurate financial records, optimize tax benefits, and make informed asset management decisions. It’s critical that financial managers, government operations teams, and asset management professionals understand asset and equipment depreciation. 

In this article, we’ll provide an in-depth look at fixed asset depreciation, why it matters to your asset management strategy, how it’s calculated, and how organizations can track depreciation effectively.

What is fixed asset depreciation?

Fixed asset depreciation refers to the value loss of an organization’s property in a fiscal year. To calculate the fixed asset depreciation rate, financial professionals systematically allocate an asset’s cost over its useful life. Instead of recording the entire expense at the time of purchase, organizations spread the cost over several years to reflect the asset’s decreasing value or depreciation rate.

Examples of depreciable fixed assets

There are various types of fixed assets that financial professionals depreciate. They span uses and functions across an organization but typically fall into several common buckets. Common fixed assets subject to depreciation include:

Buildings

Buildings are common property for many organizations. Like residential properties, they degrade over time. However, unlike residences, this wear reduces value. 

Vehicles

Vehicles or fleets are part of many organizations. Cars, trucks, and heavy equipment depreciate with use. 

Equipment

Equipment is likely the most operationally essential asset group. Office, medical, and industrial equipment loses value with wear and obsolescence. 

Technology assets

Technology is also an essential part of modern organizations’ operations. Computers, servers, and software licenses depreciate as they become outdated.

Why would an organization need to depreciate fixed assets?

Depreciation is central to reporting on documents like a profit and loss statement. But even in organizations that aren’t required to provide these types of financial documents, depreciation rate calculation is necessary. Tracking fixed asset depreciation offers several key benefits, including:

Financial reporting accuracy 

Accounting standards like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require organizations to depreciate assets to reflect their true financial position.

Without proper depreciation tracking, financial statements could overstate asset values, leading to inaccurate assessments of financial health.

Tax advantages 

Depreciation provides organizations with tax benefits. It allows them to deduct a portion of an asset’s cost each year, reducing overall taxable income. It’s especially critical for organizations with significant capital improvement investments in equipment, buildings, and infrastructure.

Different tax laws and regulations govern how businesses can apply depreciation like:

• MACRS (Modified Accelerated Cost Recovery System)
• Section 179 deduction
• Bonus depreciation

Improved capital planning 

Asset depreciation is a major factor in capital planning and capital budgeting. Financial professionals use depreciation schedules to forecast when assets will reach the end of their useful life. This information is also critical for planning replacements.

Informed asset management decisions

Depreciation data is a powerful tool for making informed asset management decisions. It helps organizations in asset lifecycle management, meaning determining whether to repair, replace, or dispose of assets.

Methods of depreciating fixed assets

Different depreciation methods allow organizations to account for asset value loss in a way that aligns with financial and operational strategies. Your organization may use one of the following popular methods or have a custom depreciation strategy that it relies on. 

Each technique has its own set of advantages and disadvantages. Your organization will have to decide which method will work best and provide the most benefit to your fixed asset management strategy.

Straight-line depreciation

The most common depreciation method. It spreads asset costs equally every year.

Declining balance depreciation

This method uses an accelerated depreciation system that expenses more during the first years an organization owns an asset. Then, less depreciation expenses after.

Units of production depreciation

Bases depreciation on the asset’s output or usage. This method calculates depreciation based on the value it’s creating for an organization instead of its service time.

Sum-of-the-years’ digits (SYD) depreciation

SYD accelerates depreciation but at a decreasing rate, making it useful for assets that generate more value in their early years.

What is a fixed asset depreciation schedule?

A fixed asset depreciation schedule is a detailed record that tracks depreciation over time. It helps organizations maintain compliance, plan for future investments, create maintenance strategies, and support audits. Here is what you should include in your fixed asset depreciation schedule: 

Tangible assets’ details

This is how you identify each asset in the portfolio. The asset details should include name, type, and acquisition cost. This section will include every tangible asset but not current assets, nor any intangible asset.

Date of purchase

Simply put, this is when your organization originally purchased a specific asset.

Cost

This should indicate the original cost of the asset.

Useful life

Useful life is an important part of the schedule. In this section, you should state how long the asset is expected to remain functional. 

Depreciation method

In this section of the schedule, it is critical to outline the method for depreciation expense that you will use on a particular asset. Whether that is straight-line, declining balance, etc., it should be noted here. 

Current depreciation

This section should indicate how much an asset will depreciation in the given fiscal year. It’s not the accumulated depreciation.

Accumulated depreciation

This is the total depreciation expense recorded to date. It includes current and past depreciation values.

Net book value

The current value of the asset after depreciation.

Fixed asset depreciation schedule template

Fixed asset depreciation schedules are an important part of financial reporting. Here is a downloadable version. 

How to calculate fixed asset depreciation

For organizations looking to calculate depreciation, following a structured approach ensures accuracy and compliance.

Formula:
Annual Depreciation = (Cost of Asset − Salvage Value) / Useful Life

Example:
A company purchases equipment for $50,000 with a useful life of 10 years and a salvage value of $5,000.

The company records $4,500 in depreciation expense each year.

Step-by-step straight-line depreciation calculation

Follow these steps to use the most common depreciation method: 

1. Determine asset cost—Include purchase price, taxes, and installation costs
2. Estimate salvage value—The expected residual value at the end of its useful life
3. Establish useful life—Number of years the asset will be used
4. Apply the formula—Use the straight-line depreciation formula

Leveraging fixed asset management software

Managing depreciation schedules manually can be time-consuming. Fixed asset management software automates calculations, tracks asset lifecycles, and generates reports for financial and auditing purposes.

Fixed asset depreciation is essential for financial accuracy, tax benefits, and asset planning. Understanding different depreciation methods, maintaining schedules, and leveraging asset management software can help organizations optimize their asset strategies.

FAQs about fixed asset depreciation

How long is the depreciation period for common fixed assets?

Depreciation periods vary based on asset type and accounting standards. For example:

• Vehicles: 5 years
• Office furniture: 7 years
• Buildings: 27.5–39 years (depending on classification)

What happens when an asset is fully depreciated?

Once an asset reaches the end of its useful life, it no longer accumulates depreciation. However, it may still have operational value or require disposal.

Can depreciation be adjusted for unexpected events?

Yes. If an asset’s condition changes significantly (e.g., damage, obsolescence), organizations can reassess depreciation estimates.