What Are Depreciable Assets

Assets such as machinery, vehicles, equipment, computers, desks, warehouses, and buildings all have lifespans. These tangible assets are all purchased for business purposes, and as they age, they become less effective and less valuable. 

Businesses record this loss of value as depreciation, and there are many ways to measure and record it for Generally Accepted Accounting Principles (GAAP) and tax purposes. Depreciation is an accurate representation of an asset’s loss of value over time. Depreciation stops when the asset is taken out of service or when its “book value” reaches zero. 

While the process of depreciating assets is complicated and, in many cases, should be something left to a professional, it accomplishes three essential functions: 

• Measure and record an expense: Depreciation helps you figure out how much value your assets have lost over the year. It differs from other costs because it is an estimate of the value lost from a balance sheet item. While no cash is spent, value is lost and therefore must be subtracted from revenue when calculating profit. 

• Lower your tax bill: As with many expenses, depreciation is a deductible expense. What makes depreciation different and more complicated is that it is a deduction you can take for the same asset over multiple tax years. 

• Valuing your business: As your assets lose value, so does your business. Fixed assets are listed on the balance sheet, and each asset’s value is reduced by a contra account called “accumulated depreciation.”