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Fully Depreciated Asset Definition

What Is a Totally Depreciated Asset? 

A completely depreciated asset is a property, plant or piece of equipment (PP&E) which, for accounting functions, is price solely its salvage value. At any time when an asset is capitalized, its value is depreciated over a number of years in line with a depreciation schedule. Theoretically, this supplies a extra correct estimate of the true bills of sustaining the corporate’s operations annually.

Key Takeaways

  • A completely depreciated asset is one which has skilled its full helpful life and its remaining worth is simply its salvage worth.
  • Salvage worth is the e-book worth of an asset in spite of everything depreciation has been absolutely expensed.
  • A completely depreciated asset on a agency’s stability sheet will stay at its salvage worth annually after its helpful life except it’s disposed of.

Understanding Totally Depreciated Property

An asset can attain full depreciation when its helpful life expires or if an impairment cost is incurred towards the unique value, although that is much less widespread. If an organization takes a full impairment cost towards the asset, the asset instantly turns into absolutely depreciated, leaving solely its salvage worth (often known as terminal worth or residual value). The depreciation technique can take the type of straight-line or accelerated (double-declining-balance or sum-of-year), and when accrued depreciation matches the unique value, the asset is now absolutely depreciated on the corporate’s books.

In actuality, it’s tough to foretell the useful life of an asset, so depreciation bills signify solely a tough estimate of the true quantity of an asset used up annually. Conservative accounting practices dictate that when unsure, it’s extra prudent to make use of a sooner depreciation schedule in order that bills are acknowledged earlier. In that means, if the asset doesn’t stay out the anticipated life, the corporate doesn’t incur an surprising accounting loss. Because of these elements, it isn’t uncommon for a completely depreciated asset to nonetheless be in good working order and producing worth for the agency. The preliminary worth minus the residual worth can also be known as the “depreciable base.”

Different Concerns

If the asset continues to be deployed, no extra depreciation expense is recorded towards it. The balance sheet will nonetheless mirror the unique value of the asset and the equal quantity of accrued depreciation. Nonetheless, all else equal, with the asset nonetheless in productive use, GAAP working income will enhance as a result of no extra depreciation expense will probably be recorded. When the absolutely depreciated asset is finally disposed of, the accrued depreciation account is debited and the asset account is credited within the quantity of its authentic value.

Instance

Suppose an organization acquires a brand new automotive in order that its salespeople can go round promoting the corporate’s merchandise. This automotive has an preliminary worth of $50,000 and a helpful lifetime of ten years. To calculate yearly depreciation for accounting functions, the proprietor wants the automotive’s residual worth, or what it’s price on the finish of the ten years. Assume this worth is $5,000, and the corporate makes use of the straight-line technique of depreciation.

Subsequently, the corporate should subtract the residual worth of $5,000 from the $50,000 preliminary worth and divide by the asset’s helpful lifetime of 10 years to reach at its yearly depreciation, which is ($50,000-$5,000)/10 = $4,500. On the finish of 12 months 10, there is no such thing as a extra depreciation to deduct, and the asset is absolutely depreciated, price simply its $5,000 salvage worth.

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