Fully Depreciated

An asset is fully depreciated when the total depreciation recorded on it since it was acquired equals its depreciable cost, which is its original cost minus its estimated salvage value. At that point the asset's book value has fallen to its salvage value, often zero, and no more depreciation expense is recorded for it. The asset has used up its estimated useful life for accounting purposes, even though it may still be working perfectly well.

Being fully depreciated does not mean an asset has been sold or thrown away. A fully depreciated truck, computer or machine stays on the company's books, at its original cost and with an equal amount of accumulated depreciation, until it is disposed of. Many businesses own large numbers of fully depreciated assets that are still in daily use.

The point at which an asset becomes fully depreciated depends on its cost, salvage value, useful life and the method used. Under the straight-line method, annual depreciation is:

Here $\text{Cost}$ is the amount paid to acquire the asset and get it ready for use, $\text{Salvage value}$ is what the company expects to receive for it at the end of its life, and $\text{Useful life in years}$ is the expected period of use. The numerator is the asset's depreciable cost.

A bakery buys an oven for $45,000, expects to use it for eight years and estimates a salvage value of $5,000. Annual depreciation is $40,000 divided by 8, or $5,000. After eight years, accumulated depreciation is $40,000, the oven's book value is $5,000 and it is fully depreciated. If the bakery keeps using it in year nine, it records no further depreciation expense. Under accelerated depreciation methods such as double-declining balance, most of the cost is expensed early, but depreciation still stops when book value reaches salvage value.

While the asset remains in use, it continues to appear in the fixed asset register and in the property, plant and equipment note, with its cost and accumulated depreciation shown gross. No entry is needed each period. When the asset is eventually retired or sold, the company removes both its cost and its accumulated depreciation, and records any difference between the proceeds and the book value as a gain or loss on disposal of fixed assets.

• If the bakery scraps the oven for nothing, it debits accumulated depreciation for $40,000, debits a loss on disposal for $5,000 and credits the oven account for $45,000.
• If it sells the oven for $7,000, it debits cash for $7,000 and accumulated depreciation for $40,000, credits the oven for $45,000 and records a $2,000 gain.
• If the oven had no salvage value and is scrapped for nothing, the entry simply debits accumulated depreciation and credits the asset for the full cost, with no gain or loss.

A high proportion of fully depreciated assets can mean several things. It may show that a company's useful life estimates were too short, which would have overstated expenses in earlier years and understated them now. Both US GAAP and IFRS require useful lives to be reviewed, and IAS 16 explicitly requires a review at least at each financial year end, with any change treated as a change in accounting estimate from that point forward. It may also mean a company is running on old equipment and will soon need heavy capital expenditure, which analysts watch for when comparing the average age of fixed assets across companies. For tax purposes, assets may become fully depreciated much faster than for book purposes because of bonus depreciation and Section 179 expensing in the United States, creating differences that are tracked as deferred tax liabilities. Companies also review fully depreciated assets periodically to remove those that have been discarded but never written off, keeping the asset register accurate.