Before You Start

This guide is for bookkeepers, accountants, and business owners. It assumes a basic understanding of the Balance Sheet.

Overview

25 min
Estimated Time
Intermediate
Difficulty
Annual
Review Frequency

What You’ll Learn

  • How to categorize and record fixed assets
  • Understanding different depreciation methods
  • Calculating and posting depreciation journal entries
  • Maintaining an accurate asset register
  • Tax implications of depreciation

1. Preparation Steps

Before recording any assets, you need these accounts in your accounting software:

Required Accounts

  • Fixed Asset (e.g., Equipment, Vehicles) (Asset)
  • Accumulated Depreciation (Contra-Asset)
  • Depreciation Expense (Expense)

Optional (but recommended)

  • Gain/Loss on Asset Sale (Income/Expense)
  • Asset Disposal Expense (Expense)
  • Fixed Asset Clearing (Bank/Asset)

2. Choosing Your Depreciation Method

You have several methods to choose from, each with distinct accounting and tax implications.

Method A: Straight-Line Depreciation

This is the simplest and most common method.

Pros:
  • Easiest to calculate.
  • Provides a consistent expense over time.
  • Suitable for assets used evenly.
Cons:
  • Doesn’t reflect accelerated wear in early years.
  • May offer less tax benefit initially.

Method B: Declining Balance Depreciation

This method allocates more depreciation expense to the earlier years of an asset’s useful life.

Expert Tip: We generally recommend the Straight-Line method for ease of management and predictability. However, consult a tax professional for optimal tax strategies, especially when considering accelerated methods like Declining Balance or MACRS.

3. Step-by-Step: Setting Up Your Asset Register

Here is the high-level workflow for correctly tracking your fixed assets.

Here is a sample code block showing a typical asset entry structure.

{
  "asset_name": "Office Printer",
  "purchase_date": "2024-01-15",
  "cost": 1200.00,
  "salvage_value": 200.00,
  "useful_life_years": 5,
  "depreciation_method": "Straight-Line"
}

4. Posting Depreciation Entries

  1. 1

    Create an Asset Item (Optional but Recommended)

    In your accounting software (e.g., QuickBooks, Xero), create an item for each fixed asset. Link it to the correct Asset account on the balance sheet.

  2. 2

    Calculate Depreciation

    Based on your chosen method, calculate the annual or monthly depreciation amount for each asset. Use an asset register spreadsheet or dedicated software.

  3. 3

    Record the Journal Entry

    Debit: Depreciation Expense (e.g., $200). Credit: Accumulated Depreciation (e.g., $200). Post this entry periodically (monthly, quarterly, or annually).

  4. 4

    Maintain Your Asset Register

    Update your register with the current book value (Cost - Accumulated Depreciation) after each entry.

Common Error: Incorrect Account Usage

Depreciation should be recorded against an Accumulated Depreciation (Contra-Asset) account, not directly reducing the original Fixed Asset account. This preserves the historical cost on the balance sheet.

5. Reviewing and Reconciling

Annual Review Checklist

  • Review your asset register for accuracy
  • Verify all depreciation calculations are correct
  • Reconcile Fixed Asset and Accumulated Depreciation accounts
  • Identify any fully depreciated assets to remove
  • Consider tax implications for the current year

Need Help?

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Having trouble managing your fixed assets or calculating depreciation? Our team can help streamline your process.

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