Fixed-asset accounting is one part of a company’s financial reporting process. Accountants working in this department focus on reporting assets and any corresponding depreciation. Special terminology — such as "net of depreciation" — is common in this function. Accountants use these terms to describe financial transactions and their effects.
"Net of depreciation" indicates an asset’s historical value less all accumulated depreciation. The information resides on the company’s balance sheet. External business stakeholders can determine this information by reviewing the company’s balance sheet. Each individual asset can have a net of depreciation value.
Companies record the acquisition of large items — such as plant and equipment — as assets. The items typically have a value that lasts longer than one accounting period. Therefore, the purchase is not an expense. Depreciation represents an annual amount a company recognizes as the expense — or use — of an asset each year. This amount ultimately reduces the asset’s historical value.
Accountants can calculate depreciation in many ways, depending on the asset type and useful life. One common method is straight-line depreciation. Accountants subtract an asset’s salvage value from its historical cost. They will then divide this amount by the asset’s useful life. This amount is the annual deprecation a company can recognize each year. Accountants typically book a monthly depreciation amount for accuracy purposes.
The monthly journal entry for depreciation places a debit to depreciation expense and a credit to accumulated depreciation. Accumulated depreciation is a contra-asset account, i.e., an account that offsets an associated account. Companies report the account as an asset, even though accumulated depreciation has a natural credit balance. Stakeholders can take the asset account and subtract the accumulated depreciation balance, creating an asset value net of depreciation.
- "Intermediate Accounting"; David Spiceland, et al.; 2007