Depreciation explained
Equipment, vehicles and furniture help a business earn money for years, so their cost is spread over those years instead of being expensed on the day they are bought. Each period carries a share of the cost as depreciation expense, and the asset’s value on the balance sheet goes down by the same amount.
The simplest method is straight-line: take the cost, subtract the salvage value (what you expect it to be worth at the end), and divide by its useful life. Each year’s depreciation is the same. The entry debits depreciation expense and credits accumulated depreciation, an account that sits under the asset and reduces its book value.
Tax depreciation can follow different rules and methods from the depreciation in your books; your tax preparer works those out for your return.
Example: straight-line depreciation on a $12,000 machine
Cost $12,000, salvage value $2,000, useful life 5 years:
| Amount | |
|---|---|
| Depreciable amount ($12,000 − $2,000) | $10,000 |
| Yearly depreciation ($10,000 ÷ 5) | $2,000 |
| Monthly depreciation ($2,000 ÷ 12) | $166.67 |
| Book value after 2 years ($12,000 − $4,000) | $8,000 |
Each month’s entry: Depreciation expense $166.67 debit, Accumulated depreciation $166.67 credit. After five years the book value reaches the $2,000 salvage value.
Where you’ll see it in fiscal50
In fiscal50 each asset uses straight-line depreciation, set up with its class life in years, total basis, salvage value and whether it depreciates monthly or annually. The salvage value isn’t depreciated.
With Auto, fiscal50 creates the entries on schedule and they wait for your approval before they are posted; with Manual, you post them yourself. Automatic asset depreciation is on Business and Business Pro, and the Depreciation report shows every depreciation entry posted, by asset and category.