Accounting – How to Depreciate Assets

Business assets including copy machines, computers, and other equipment wear out. For this reason, the FRS allows you as a business owner to depreciate or allocate the cost throughout the useful life of the assets.

You should start depreciating an asset as soon as your business starts using it up to when you have recovered the asset’s entire cost or when you stop using it (Also see Difference between Impairment and Depreciation). For example, when your business purchases a printing machine, you may depreciate based on its estimated useful life and continue using it after it has depreciated fully.

Sometimes, a piece of equipment can be depreciated over a few years, but you find out that it is becoming obsolete. In this case, it will be more profitable for you to purchase a new machine. Therefore, you can either resale the old unit and exclude it from the depreciable assets or accelerate the unit’s depreciation and replace it with a new unit.

If you fully depreciate an asset, you need not to dispose of it as long as it is in good working condition. However, your business will not gain any tax benefit for recognizing depreciation expenses on the same asset. From an accounting point of view, your business will use the asset for no cost.

Unfortunately, such assets need more maintenance, and you will have to replace them in future. Therefore, to know if you should keep on using the asset, you should compare the cost of replacing that asset now and the cost of maintaining it and replace in future. Besides, you should find out if buying a new asset will reduce labor cost, offer functionality that will make your company more competitive, and make it efficient. Apart from these factors, you should consult a tax planner to find out if the tax savings created by capital allowance of a new asset can justify its purchase.

The main reason you should depreciate your fixed assets (also called the property, plant and equipment) is that they will be used for a limited number of years. With that, the matching principle requires that the real cost of the asset should be allocated to accounting periods in which the business will enjoy the benefits of using the asset. If you are unsure of the strict definition of the property, plant and equipment, you might want to consider engaging an accounting service in Singapore to get extra help.

Note that depreciation is an expense and should be debited to the expense account which appears in the income statement. Also, you should credit the accumulated depreciation account which appears on the business balance sheet as a contra entry that aims at reducing the amount of the fixed assets.