What is a fully depreciated asset?

Depreciation is a critical accounting tool, but relying on it as your only indicator of an asset’s value can lead to blind spots. Learn what blocked assets are and how they can affect businesses and individuals. The sum-of-the-years’-digits method is a more complex method that takes into account the asset’s remaining useful life.

All information published on this website is provided in good faith and for general use only. Any action you take based on the information found on cgaa.org is strictly at your discretion. CGAA will not be liable for any losses and/or damages incurred with the use of the information provided. Aaron Osinski is a versatile writer with a passion for crafting engaging content across various topics. The mid-month convention assumes that an asset is placed in service on the 15th day of the month and depreciates for the entire month.

Fully Depreciated Asset: Definition, How It Happens, and Example

• The accumulated depreciation account is debited to zero out the asset’s value, and the relevant asset account is credited.
• A fully depreciated asset is a property, plant or piece of equipment (PP&E) which, for accounting purposes, is worth only its salvage value.
• Facilio centralizes asset data, condition monitoring, and maintenance execution in one platform.

It means the asset’s accounting value is zero, though its market value might not be zero. Theoretically, depreciation provides a more accurate estimate of the true expenses of maintaining a company’s operations each year. A fully depreciated asset is a plant asset or fixed asset where the asset’s book value is equal to its estimated salvage value. In other words, all of the depreciation that was intended (cost minus estimated salvage value) has been recorded. As faithful as that rusty old truck has been, at some point the company will want to get rid of it. When it does, it compares the proceeds from the sale (or the disposal cost) with the book value of the asset and reports either a gain or a loss.

Total Asset Turnover Formula: Net /Average Total Assets

The statutory accounting bodies have laid down guidelines and accounting standards to be followed for an accounting of depreciation and fully depreciated assets. Globally as per the recent implementation of the IFRS, it will be mandatory for all the companies to prepare their financials as per the IFRS rules and regulations. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. A fully depreciated asset that continues to be used is reported at its cost in the Property, Plant and Equipment section of the balance sheet. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

The Removal of Depreciated Assets from the Accounting Records

If the asset were sold for $11,000, the first $10,000 of the gain would be recaptured as ordinary income, and the remaining $1,000 would be a capital gain under Section 1231. Since the asset’s tax basis has been reduced to its salvage value, any cash received from the sale usually results in a taxable gain. For an asset with no salvage value, the entire sale price is considered a gain. The asset’s accumulated depreciation continues to be included in the total accumulated depreciation amount that appears as a subtraction or negative amount in the Property, Plant and Equipment section. Facilio centralizes asset data, condition monitoring, and maintenance execution in one platform. It gives you real-time visibility into asset health, usage, and lifecycle value—the very factors that influence how, when, and why your assets lose value.

Real-life example: How depreciation affects more than just accounting

Once a fixed asset has been fully depreciated, the key point is to ensure that no additional depreciation is recorded against the asset. Additional depreciation charges can occur when depreciation is being calculated manually or with an electronic spreadsheet. A commercial fixed asset database will automatically turn off depreciation, as long as the termination date was correctly set in the system. TCO goes beyond purchase price to include all lifecycle costs—maintenance, repairs, energy use, and eventual disposal or replacement. Depreciation isn’t just an operational concern—it’s a core accounting principle.

What is equipment depreciation?

In other words, the asset’s accumulated depreciation is equal to the asset’s cost (or to its estimated salvage value). Once an asset is fully depreciated, it remains on a company’s balance sheet at its salvage value, if any. At its what does fully depreciated mean core, equipment depreciation is the gradual loss of value that occurs as assets age, are used, or become outdated.

• A fully depreciated asset is a depreciable asset for which no additional depreciation expense will be recorded.
• In accounting, a fully depreciated asset is worth only its salvage value, and there will be no further depreciation expense if the asset continues to be used without improvement expenditures.
• If a fully depreciated asset is scrapped or donated, the tax treatment can vary.
• The sum-of-the-years’-digits method can result in a higher depreciation expense in the early years of an asset’s life.
• The concept of fully depreciated assets embodies more than just the accounting principle of matching expenses with revenues.
• The presence of fully depreciated assets also affects the calculation of return on assets (ROA).

How to choose the right method: when to use which method of calculation

When it comes to tax implications, fully depreciated assets present a unique set of considerations. Although these assets no longer contribute to depreciation deductions, they still hold relevance in tax planning and compliance. One of the primary concerns is the potential for recapture of depreciation if the asset is sold. Depreciation recapture can result in a significant tax liability, as the difference between the asset’s sale price and its depreciated value is taxed as ordinary income. This can be particularly impactful for businesses with a large number of fully depreciated assets that are still in use and may eventually be sold. This knowledge is crucial for making informed financial decisions and maintaining accurate accounting records.

At that point, both the asset’s cost and its accumulated depreciation are removed from the balance sheet. A fixed asset is fully depreciated when its original recorded cost, less any salvage value, matches its total accumulated depreciation. A fixed asset can also be fully depreciated if an impairment charge is recorded against the original recorded cost, leaving no more than the salvage value of the asset.