What is the accounting treatment for an asset that is fully depreciated, but continues to be used in a business?

The sale of completely depreciated assets must be disclosed accurately, and all applicable tax laws and regulations must be followed. If the sale price of a completely depreciated asset is less than its tax basis, there may occasionally be a capital loss. The idea that completely depreciated assets have book values of zero (or salvage value) emphasizes the idea that depreciation is a way to spread out the expense of an item throughout its useful life. The depreciation expense for the equipment is $20,000 per year over a 5 year period.

  • In reality, it is difficult to predict the useful life of an asset, so depreciation expenses represent only a rough estimate of the true amount of an asset used up each year.
  • Get help and simplify your accounting with tax services and expense management software.
  • Routine repair and maintenance costs should be expensed as they are incurred.
  • For realty, the actual deduction is figured by applying a percentage taken from an IRS table applicable to the property based on the month it’s placed in service.

Governments using this method should be able to identify the assets using other source records such as operational records. When some items within the group are retired, the cost of the items is removed from both the asset and the accumulated depreciation account and no gain or loss is recognized. Depreciation continues to be charged only for the remaining assets at the original rate. The gain or loss is deferred until the entire asset group is disposed of, at which point it would be recognized. For permanently impaired assets, the appropriate accounting and financial reporting depends on whether the asset is expected to remain in service.

Any gains or losses from selling the asset will be reflected on the income statement, and the sale will be recorded separately. Fully depreciated assets (FDA) greatly impacts the balance sheet and the income statement. The entire depreciation of an asset has an impact on the balance sheet items property, plant, and equipment (PP&E) and accumulated depreciation. The accumulated depreciation account is a contra asset account on a company’s balance sheet, meaning it has a credit balance.

What to do with fully depreciated assets that an entity continues to use

For quarries, timberlands, and mineral rights, depletion expenses must be recorded. If the asset is still deployed, no more depreciation expense is recorded against it. The balance sheet will still reflect the original cost of the asset and the equivalent amount of accumulated depreciation. However, all else equal, with the asset still in productive use, GAAP operating profits will increase because no more depreciation expense will be recorded.

Otherwise, capital assets impairment should be treated as an element of net program cost in appropriate functional category. For example, the transfer of assets relating to an annexation should be recorded at the carrying value of the transferor (the government giving up the assets). Contributed capital assets intended to be used in operations should be reported at the acquisition value. Contributed capital assets intended to be sold should be reported at fair value. There are different methods for calculating depreciation for small businesses.


Many auditors find that in the time of physically comparing the inventory of fixed or intangible assets, there are fully depreciated assets within the financial statements that the entity is still using. Ideally, governments should base useful life estimates on its actual experience and plans. For example, internal sources of information about useful life might include property replacement policies or practices, property disposal information, and budgeting information regarding the planned timing for replacement of assets.

Definition of a Fully Depreciated Asset

However, property subject to floor plan financing (the type of financing used by car dealers) does not qualify for bonus depreciation. Generally, if you’re depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS). There are also special rules and limits for depreciation of listed property, including automobiles. Computers and related peripheral equipment are not included as listed property.

Credits & Deductions

Once the capital asset system is in operation, the government needs to make sure that assets which should be capitalized are properly recorded and that records are brought up to date when assets are disposed of or replaced. The basic depreciation system currently in use is the Modified Accelerated Cost Recovery System (MACRS). With this system in place, you select the most appropriate depreciation method and convention for calculating depreciation on an item. The most common of these is the General Depreciation System (GDS), which contains the recovery periods referenced above. However, you may be required by law to use the Alternative Depreciation System (ADS), which has different recovery periods. This means that you divide the cost (minus the estimated salvage value at end of useful life) by the years of life.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

Or you may be required or choose to use a method that spreads deductions for cost over the life of the property. Usually, accelerated depreciation is preferable because you 5 reasons for quality inventory management systems get your tax breaks quickly. But startups that expect to have more income in the future may prefer to spread deductions, effectively saving deductions for later years.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. These materials were downloaded from PwC’s Viewpoint ( under license. For reporting requirements, see GASB Statement 69, Government Combinations and Disposal of Government Operations for further details.

In this case, the original estimate of machinery’s useful life proved to be incorrect. Nevertheless, there are factors, such as technical or commercial obsolescence and natural impairment caused by the lack of use of the asset. However, on many occasions, the management of the companies forgets to carry out an annual review of these useful lives to establish if it has changed according to new circumstances.


Tonmoy Antu

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