A business usually owns various capital assets, which are long-term assets that generate value for the business. These assets receive a different accounting treatment compared to other assets. Capital assets go through the depreciation process to account for deterioration and decrease in value over their useful life. Each year's depreciation can be considered an expense, even though the business does not need to pay cash to cover it.
Depreciation removes some of the value of a capital asset each year until the end of its useful life. When a business buys a capital asset, it does not immediately list the purchase price as an expense. Instead, the business reports the expense as the asset depreciates. This way, the business does not claim the expense all at once, but spreads it out over time. This allows the business to distribute its tax burden over time.
You can calculate depreciation using various methods, but the most common method is the straight-line method. The straight-line method depreciates a certain amount each year. For example, if a piece of machinery costs $50,000 to purchase, lasts for 10 years and has no value at the end of its useful life, then it would depreciate by $5,000 per year. With other depreciation methods, you may depreciate a different amount each year.
Depreciation Lapse Schedule
A business may have several different capital assets depreciating at any time. For example, the business may depreciate its machinery, vehicles, buildings and furniture. A depreciation lapse schedule lists all the depreciation items the business has in a year and adds the total depreciation amount. The schedule may cover a period of several years. The depreciation lapse schedule may be based on the fiscal year or the calendar year.
The depreciation lapse schedule allows a business to keep track of all its capital assets, their reported values and the amount of depreciation expense the business claims each year. This helps accountants enter the correct data to financial statements and determine how to depreciate newly acquired capital assets. The business may use the depreciation lapse schedule each month for regular statements and each year for the end-of-year compliance reporting.
- California State University Northridge: Depreciation, Amortization, Depletion
- Rhode Island Public Utilities Commission; Prefiled Direct Testimony; July 2006
- Plante and Moran; Year-End Planning Items to Consider; August 2006
- Internal Revenue Service (IRS). "Topic No. 704 Depreciation." Accessed July 26, 2020.
Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.