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Fully Depreciated Asset

A fully depreciated asset is an asset that has been depreciated over its useful life down to its salvage value. Assets are depreciated over several years to accurately capture expenses, with the accumulated depreciation reducing the asset's book value until it matches the original cost. Once this occurs, the asset is fully depreciated and will remain on the balance sheet at its salvage value unless disposed of. While fully depreciated, the asset no longer generates depreciation expenses but its initial cost is still reflected with equal accumulated depreciation.

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82 views

Fully Depreciated Asset

A fully depreciated asset is an asset that has been depreciated over its useful life down to its salvage value. Assets are depreciated over several years to accurately capture expenses, with the accumulated depreciation reducing the asset's book value until it matches the original cost. Once this occurs, the asset is fully depreciated and will remain on the balance sheet at its salvage value unless disposed of. While fully depreciated, the asset no longer generates depreciation expenses but its initial cost is still reflected with equal accumulated depreciation.

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Fully Depreciated Asset

investopedia.com/terms/f/fully-depreciated-asset.asp

By Adam Hayes

What Is a Fully Depreciated Asset?


A fully depreciated asset is a property, plant or piece of equipment (PP&E) which, for
accounting purposes, is worth only its salvage value. Whenever an asset is capitalized, its
cost is depreciated over several years according to a depreciation schedule. Theoretically,
this provides a more accurate estimate of the true expenses of maintaining the company's
operations each year.

Key Takeaways

A fully depreciated asset is one which has experienced its full useful life and its
remaining value is just its salvage value.
Salvage value is the book value of an asset after all depreciation has been fully
expensed.
A fully depreciated asset on a firm's balance sheet will remain at its salvage value
each year after its useful life unless it is disposed of.

Understanding Fully Depreciated Assets


An asset can reach full depreciation when its useful life expires or if an impairment charge
is incurred against the original cost, though this is less common. If a company takes a full
impairment charge against the asset, the asset immediately becomes fully depreciated,
leaving only its salvage value (also known as terminal value or residual value). The
depreciation method can take the form of straight-line or accelerated (double-declining-
balance or sum-of-year), and when accumulated depreciation matches the original cost,
the asset is now fully depreciated on the company's books.

In reality, it is difficult to predict the useful life of an asset, so depreciation expenses


represent only a rough estimate of the true amount of an asset used up each year.
Conservative accounting practices dictate that when in doubt, it is more prudent to use a
faster depreciation schedule so that expenses are recognized earlier. In that way, if the
asset does not live out the expected life, the company does not incur an unexpected
accounting loss. Due to these factors, it is not unusual for a fully depreciated asset to still
be in good working order and producing value for the firm. The initial value minus the
residual value is also referred to as the "depreciable base."

Other Considerations
If the asset is still deployed, no more depreciation expense is recorded against it. The
balance sheet will still reflect the original cost of the asset and the equivalent amount of
accumulated depreciation. However, all else equal, with the asset still in productive use,

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GAAP operating profits will increase because no more depreciation expense will be
recorded. When the fully depreciated asset is eventually disposed of, the accumulated
depreciation account is debited and the asset account is credited in the amount of its
original cost.

Example
Suppose a company acquires a new car so that its salespeople can go around selling the
company's products. This car has an initial value of $50,000 and a useful life of ten years.
To calculate yearly depreciation for accounting purposes, the owner needs the car's
residual value, or what it is worth at the end of the ten years. Assume this value is $5,000,
and the company uses the straight-line method of depreciation.

Therefore, the company must subtract the residual value of zero from the $50,000 initial
value and divide by the asset's useful life of 10 years to arrive at its yearly depreciation,
which is ($50,000-$5,000)/10 = $4,500. At the end of year 10, there is no more
depreciation to deduct, and the asset is fully depreciated, worth just its $5,000 salvage
value.

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