A company's long-term or fixed assets make up a large portion of its balance sheet, also known as statement of financial condition. Funded depreciation helps a firm renew operating machinery and equipment.
Depreciating an asset means allocating the asset's cost over its useful life. The useful life of an asset, or economic resource, is the period of time over which a company intends to use this asset in operating activities or manufacturing processes.
Funded Depreciation Defined
Funded depreciation is a fixed asset management method that helps a company set aside funds to renew machinery and equipment that it uses in operating activities. For instance, a company buys a new truck valued at $100,000 and records $10,000 in annual depreciation expense over 10 years. Every year, the company will set aside $10,000 so that it will be able to buy another truck after 10 years.
Funded depreciation is a key business practice because it helps a company improve operating activities and increase process efficiency in the short and long terms. Functional and efficient machinery helps improve manufacturing processes.