How to Depreciate Your Small Business Assets

For purposes of keeping the books for your small company, depreciation is the method used to distribute the cost of a fixed asset over its useful life. Depreciation expense is recognized in each period, in order to match the income generated by the company with the expenses incurred in order to produce the revenue, including part of the cost of property, plant and equipment. An offset is recorded in accumulated depreciation, which is an account with a credit balance in the asset section of the balance sheet. Accumulated depreciation is presented in the financial statements along with the corresponding assets, to show the balance in property, plant, and equipment, net of depreciation.

For tax purposes, depreciation is the way you recover the cost represented by your investment in the asset, through deductions you can take on your annual federal income tax return.

Depreciation for financial accounting purposes; that is, the depreciation you record on your books and report in your financial statements, can be different from the depreciation you can claim for tax purposes.

Depreciation Methods for Financial Accounting Purposes

Depreciation for financial accounting purposes can be calculated based on production or the passage of time. When it is calculated based on time, depreciation can be straight-line, with equal charges every period, or it can be decreasing, with higher charges at the beginning of the asset's useful life, that decrease over time.

Depreciation Based on Level of Activity or Units of Production

According to this method, the asset is depreciated based on its use or productivity instead of the passage of time. The useful life of the asset is defined based on its yield or capacity, such as the quantity of units it can produce, or the hours it can work.