Accounting Depreciation: Definition and Operation
Jan 23, 2024
What is Accounting Depreciation?
In accounting, depreciation refers to the allocation of the value of assets over their useful life. Simply put, it involves recognizing the decrease in value of an asset and reflecting it in the assessment of assets on the company's balance sheet. Accounting depreciation is thus about determining the depreciation of assets and recording their value. An investment can depreciate due to usage, technological changes, or the effects of time. These are physical, technical, or economic factors. Let's take a simple example: a desktop computer. If you buy a computer today for your business with the latest technology, in 5 years, it will have depreciated. Besides likely being technologically outdated, it will have degraded somewhat due to use. Thus, its value will decrease, even without changing components, mainly due to technological evolution factors.
What are the Conditions for an Asset to be Depreciable?
For an asset to be depreciable, its use by the company must be specific. On a financial level, it must be possible to determine how this investment will be used, typically over a limited period. Depreciable assets include tangible assets such as buildings, fixtures, furniture, equipment, and office and computer supplies. As for intangible assets, only certain ones are depreciable. Most intangible assets do not depreciate due to use or time. However, it's possible to depreciate an intangible asset if its beneficial effects for the company are expected to end on a specific date. This includes patents, licenses, software development and design costs, and, under certain conditions, website creation.
What is the Asset Lifespan for Accounting Depreciation?
The useful lifespan of an asset for depreciation depends on its actual usage by the company. There are established tax-deductible lifespans. Several depreciation methods are allowed in accounting:
Straight-line depreciation: Equal distribution of asset depreciation over its lifespan.
Declining balance depreciation: Depreciation amount decreases over time, suitable for rapidly depreciating assets.
Variable depreciation: Also known as unit of production (UOP) depreciation, suitable for assets measured in units rather than periods.
What is the fiscally acceptable immobilization period?
The maximum linear depreciation rates provided for in paragraph I of Article 12 bis of the Income Tax Code for individuals and corporate income tax related to assets and their components owned by the company, including buildings on others' land, are set according to Decree No. 2008-492 of February 25, 2008, fixing the maximum linear depreciation rates and the minimum duration of depreciation of assets operated under leasing contracts and the value of fixed assets eligible for full depreciation for the year of their use.
Our Advice
Which assets can you depreciate? What is the best calculation method for accurate and fair depreciation? How to integrate these elements into your balance sheet? Seek advice from an accountant to properly manage this financial aspect, essential for your company's health.
