What is a Depreciation Schedule?
Depreciation is key in maximizing asset ROI, while minimizing the financial impact of acquisition. How companies choose to write down assets over time differs, yet all write-downs follow a depreciation schedule. This schedule is a breakdown of the depreciation expense, calculated and allocated over the span of an asset’s useful life.
Whether companies choose an accelerated or straight-line depreciation method, it must track the amount and make sure it aligns with the broader depreciation schedule. Deviating from the schedule or changing it can trigger attention from the IRS.
Here’s a closer look at depreciation schedules, how they work and how they differ depending on the asset’s useful life and the mode of depreciation.
What is Depreciation?
Every asset has a useful life. The IRS determines useful life according to the type of asset. Asset lifespans range from three years to more than 50 years. Over that useful life, companies use up more and more of that asset’s capabilities, until it no longer has any value from a financial standpoint. To reflect this consumption of capabilities, companies depreciate assets. It involves writing down a portion of the asset’s cost for each predetermined year of its useful life. This is the depreciation schedule.
What’s Included in a Depreciation Schedule
When reporting asset depreciation, companies use a depreciation schedule. This is a timetable of the asset’s useful life, tracked to the current point, with depreciable expenses recorded. It generally includes the following information:
- Date of asset purchase
- Asset description
- Original price paid
- Expected useful life
- Depreciation method used
- Salvage value
The schedule serves two chief purposes: to help companies accurately depreciate assets year-over-year and to show transparency and compliance with IRS depreciation guidelines. It’s also forward-looking, allowing companies to understand depreciation and tax implications in the future.
Different Modes of Depreciation
An asset’s rate of depreciation—and therefore its depreciation schedule—differ greatly depending on which mode of depreciation the company selects. There are straight-line and accelerated methods. And while the useful life of the asset won’t change (usually), the amount depreciated over each year might.
In straight-line depreciation, companies write down the same amount each year for the useful life of the asset. If it’s a $100,000 machine with a 10-year useful life, the company would write down $10,000 annually in depreciation expense. This mode of depreciation is predictable, which simplifies its depreciation schedule.
Double-Declining Balance Depreciation
As the name implies, this accelerated depreciation schedule starts by doubling the standard expense, then exponentially decreasing the depreciation amount for the life of the asset. A $100,000 machine with a 10-year double-declining balance depreciation schedule would see a write-down of $20,000 in year one, $16,000 in year two, $12,800 in year three, and so on.
Another form of accelerated write-down, this mode of depreciation offers better back-end allocation of costs in the depreciation schedule, while still allowing companies to write down more upfront. A company would add useful life years together, then apply the sum as a depreciation percentage to the remaining years in the schedule, accounting for salvage value.
Units of Production Depreciation
This form of depreciation factors in an asset’s production efficiency. It involves finding the book value of the asset, then dividing it against a quantifiable output to get a base unit for depreciation expense. Then, multiplying the base unit to the number of units produced in the given year to create a depreciation value. Once fully depreciated, companies can’t write down any other costs against the asset, even if it’s still producing.
There are even more modes of depreciation, including the Modified Accelerated Cost Recovery System (MACRS). No matter the depreciation method chosen by companies, the schedule remains the same, dictated by the asset’s useful life.
It’s also possible to change the method of depreciation for an asset by filing IRS Form 3115, Application for Change in Accounting Method. This form needs to include an explanation (justification) for the switch in depreciation accounting. Note that it doesn’t change the depreciation schedule; only the mode of depreciation.
What Happens if Useful Life Changes?
In certain situations, an asset’s depreciation schedule might change. For example, a company might invest $10,000 in a piece of technology that has a five-year useful life. Then, two years into the depreciation schedule, the equipment suddenly becomes obsolete. There are still three years left on the depreciation schedule, but the asset is effectively useless. The opposite can happen, as well. An asset that once had five years might end up with seven years.
If the useful life of an asset changes, so will its depreciation schedule. Shortened asset lifespan accelerates the write-down across remaining years; longer lifespans decrease the annual write-down amount.
Companies can’t just change the depreciation schedule of an asset. They must meet certain criteria as defined by the IRS to change depreciation schedules—events such as extraordinary repairs to PP&E.
Depreciation Schedule Tracks the Useful Life of an Asset
Every asset a company acquires comes with a finite functional life—or, at least, a period of time where it will reliably generate ROI for the company. The company will depreciate the cost of this asset over that useful life, following a depreciation schedule. The mode of depreciation will inform the schedule, and the schedule itself is a useful tool that companies can look at to better understand that asset on the balance sheet.
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