Depreciable assets and non-depreciable assets

Charmaine Machingauta This blog was written by Charmaine Machingauta, an accounting intern at Thaddeus. She enjoys research and aspires to be an individual who uses her knowledge and skills to help the community and the world at large, thus she chose to work at Thaddeus.
December 3, 2022

Depreciable Assets

Depreciable assets are a subset of fixed assets. Because fixed assets have a useful life of more than one reporting period (again, generally defined as one year), the company must account for the cost of purchasing the fixed asset over its useful life. It does this with a process called depreciation for tangible assets or amortization for intangible assets. Any fixed asset that is subject to depreciation or amortization is considered a depreciable asset.

Depreciable business assets are forms of business expenses that apply to items with set lifespans. Depreciable assets decay, lose value, become desolate, or get used up, as they are used in the business to generate income. Businesses can continue to receive tax write-offs throughout the asset's life span. in the process of acquiring the assets, there is a cash outflow that is made, in which the purchases of assets are not regarded as an expense, but rather are viewed as an exchange of one asset (cash) for another asset equipment.

For example, consider a $140,000 piece of farm equipment purchased for use on a farm with an expected useful life of 12 years and an expected remaining (salvage) value of $20,000 at the end of those 12 years. The equipment's book value would be reduced by $120,000 over those 12 years. Using straight-line depreciation results in a depreciation expense of $10,000 per year for the equipment over its useful life. If you paid cash for this equipment, $140,000 would flow out of the business at the time of purchase and $20,000 would flow back into the business upon its sale at the end of 12 years. Neither of these transactions would affect the totals on the balance sheet and neither would represent an expense or income. Expense transactions would occur annually in the form of non-cash depreciation expenses. These depreciation expenses would reduce the asset book value of the equipment and, thus, have a negative impact on equity.  

Non-Depreciable Assets

Non-depreciable assets do not lose value as they generate income for the business over time. The primary example of this in farming is land. Excluding arguments that the land is being depleted (i.e., resources are being mined or extracted from it), land does not depreciate in value over time. In fact, agricultural land is generally viewed as a safe investment with a long track record of appreciation in value over time.

Examples of non-depreciable assets are:

  • Land
  • Current assets such as cash in hand, receivables
  • Investments such as stocks and bonds
  • Personal property (Not used for business)
  • Leased property
  • Collectibles such as memorabilia, art and coins

For example, if the same $140,000 in cash were invested in land, the initial transaction would look very similar to buying farm equipment. One asset (cash) is exchanged for another asset (land). Total assets, liabilities, and equity on the balance sheet would remain the same. However, as the land is used over time to generate income, it maintains its value at $140,000, or possibly increases in market value (appreciates) as mentioned above. No depreciation expenses would accumulate. If the return on equity for the business is 7 percent, the $140,000 land investment and the $140,000 equipment investment would seemingly provide similar benefits, except where the equipment investment includes the burden of depreciation expense.  

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