Assets That Can And Cannot Be Depreciated | Accountingo

Depreciable assets include all tangible fixed assets of a business that can be seen and touched such as buildings, machinery, vehicles, and equipment. 

In accounting, we do not depreciate intangible assets such as software and patents. Instead of depreciating such assets, we amortize them which is quite similar to depreciation. But because there are separate accounting rules to consider when applying amortization, most accountants refer to intangible assets as non-depreciable assets.     

Depreciable assets are expected to last at least 12 months in the business from when they are acquired. 

For example, a restaurant purchases a delivery bike and expects to use it for five years. The delivery bike is a depreciable asset of the restaurant because its expected useful life is more than 12 months from its acquisition.

As you probably know, the basic calculation of depreciation involves dividing the cost of a fixed asset over its useful life using a suitable depreciation method. 

So to calculate the depreciation expense, we need to quantify the useful life of the asset mathematically.

For example, library books may last no more than ten years before needing to be replaced with newer editions.

A computer system purchased to run the payroll software may be expected to last only five years before needing replacement to keep up with the updates in the payroll software.

If an asset has an unlimited useful life, such as a piece of land, it is not considered a depreciable asset in accounting. That’s because such assets can be practically used forever without any apparent reduction in value.

In most cases, this means that a business only depreciates those assets that it owns. For example, an airline can depreciate an aircraft that it owns. 

However, a business cannot depreciate an asset that it does not effectively own. For instance, if an airline hires an aircraft temporarily in anticipation of a busy season, it should not be considered as a depreciable property of the airline. 

The expected value of depreciable assets towards the end of their useful lives is lower than their original cost to the business. 

For example, let’s say an animation studio purchased a drawing tablet five years ago for $1000. Today that drawing tablet is worth only $200. The reasons why the drawing tablet has depreciated by $800 in 5 years include:

• The drawing tablet has worn out from having been used all these years.
• Newer drawing tablets with better features are available in the market that are also more efficient and compatible with the latest technology. The current value of the outdated tablet should understandably be lower than that of the newer models.
• Shifts in the animation industry make it necessary for the studio to replace its drawing tablets with newer versions to grow and compete.