Updated July 14, 2023
Definition of Fully Depreciated Assets
Fully depreciated assets can defines as any long-term economic benefit generating resource, i.e. a plant, property, or any other equipment whose entire book value has been written off or charged as expense over its useful life as depreciation or impairment loss (multiple accounting periods) in accordance with the applicable Generally accepted accounting principles guidelines which may or may not have left with physical existence.
Explanation
Any long-term asset capitalizes in books of accounts and depreciates over a period of time; it expects to generate economic benefits. These depreciation charges are in accordance with the matching principle, which matches revenue with related expenses incurred. Once the entire book balance of any asset is charged in the Statement of Profit & Loss as an expense, it creates a fully depreciated asset, i.e., an asset that has completed its full useful life, and the remaining that exists now is its salvage value.
Salvage value is the asset’s remaining or book value calculated after all depreciation charges. Salvage value is also known as terminal value or residual value. An asset reaches full depreciation when its usefulness is complete, and the remaining part uses only if the entity, against its original cost, provides the impairment charges.
Example of Fully Depreciated Assets
Consider a movers and packers company that purchases trucks for transportation. The initial value of a truck was $1,00,000, and the useful life of 10. The salvage value of such transportation trucks is estimated to be $10,000, and the company uses the straight-line depreciation method.
Here, the company subtracts the salvage value of zero from the $100000 initial value and divides it by the useful life of ten years of the asset to arrive at its yearly depreciation, which is ($100000 – $10000 / 10 = $9000). After 10 years, the asset will become a fully depreciated asset as there will not be any further depreciable value left to charge as depreciation. Under such conditions, the asset will treat as fully depreciated.
Accounting for Fully Depreciated Assets
The accounting for the fully depreciated asset is done by continuously reporting the cost and accumulated depreciation of an asset in the balance sheet. A fully depreciated asset will report in a balance sheet as follows:
- Cost: Complete utilization of the asset’s cost will list as a fixed assets item under the asset section of the balance sheet.
- Depreciation: The accumulated depreciation will be listed below the fixed asset column in the accumulating depreciation contra asset column.
No further accounting is required until either selling or scraping disposes of the asset, as no additional depreciation is required. A fixed asset consider fully depreciated when it has charged the entire depreciable balance of that asset as an expense, i.e., the original cost of an asset is reduced by salvage value matches with its total accumulated depreciation, or an impairment loss is charged on that asset. The absence of depreciation expense will reduce the depreciation expense in the income statement, increasing the organization’s non-cash profits.
Such assets may have been retired from active use and are usually shown at lower salvage or net realizable value. Any profit or loss on such retiral will be immediately provided in books of accounts. If the underlying asset is still being used, removing a fixed asset cost and accumulating depreciation from the accounting cost is incorrect for two reasons.
Fully Depreciated Assets Journal Entry
Journal entries for fully depreciated assets are given below:
Example
Pass Accounting entry for disposal of the fully depreciated asset as of 31/12/2019 using the following Info.: –
- Consider a cloth manufacturing company that purchased Machinery on 01/01/2010 for printing worth $2,10,000
- The salvage value expected was $10,000 as on 31/12/2019
- The company uses the straight-line depreciation method
Pass entry in each of the following separate situations, company: –
- Didn’t sell the asset, and NRV is expected to be $10,000 only,
- Sold machine for $8,000
- Sold machine for $20,000
Solution:
- Annual depreciation is $20,000 (2,10,000 – 10,000) / 10
- WDV of machine as on 31/12/2019 is $10,000 ($2,10,000 – $2,00,000)
Entries: If the company does not sell an asset, it will require no accounting entry, and the asset will be shown at $10,000(NRV) as of 31/12/2019.
- If the company sells an asset for $8,000:
|
Date |
Particulars | Debit |
Credit |
In case the company does not maintain Acc. Dep. A/c |
| 31-12-2019 | Cash A/c Dr. | 8,000 | ||
| Loss on Sale of Machinery A/c | 2,000 | |||
| To Machinery A/c | 10,000 | |||
| (Being machine sold at a loss of 2,000) |
| Date | Particulars | Debit | Credit | In case the company maintains Acc. Dep. A/c |
| 31-12-2019 | Cash A/c Dr. | 8,000 | ||
| Loss on Sale of Machinery A/c Dr. | 2,000 | |||
| Acc. Depreciation A/c Dr. | 2,00,000 | |||
| To Machinery A/c | 2,10,000 | |||
| (Being machine sold at a loss of 2,000) |
- Sold for 20,000
|
Date |
Particulars | Debit |
Credit |
In case the company does not maintain Acc. Dep. A/c |
| 31-12-2019 | Cash A/c Dr. | 8,000 | ||
| To Machinery A/c | 10,000 | |||
| To Profit on the Sale of Machinery A/c | 10,000 | |||
| (Being machine sold at a loss of 2,000) |
| Date | Particulars | Debit | Credit | In case the company maintains Acc. Dep. A/c |
| 31-12-2019 | Cash A/c Dr. | 20,000 | ||
| Acc. Depreciation A/c Dr. | 2,00,000 | |||
| To Machinery A/c | 2,10,000 | |||
| To Profit on the Sale of Machinery A/c | 10,000 | |||
| (Being machine sold at a loss of 2,000) |
Fully Depreciated Assets on Balance Sheet
Fully depreciated assets that are actively used are reported at a cost under the balance sheet’s Plant, Property, and Equipment section. Under the same section, accumulated depreciation is also reported, which results in a net written down value. This net amount is carrying value or written down value. The carrying value is determined when the accumulated depreciation is subtracted from the combination of these assets. Depreciation and the asset’s cost will be reported until the company fully disposes of the asset.
The disposal can be done either through sale, scrap, or transfer. Usually, such assets may form part of assets retired from active use as they are no longer useful or have become obsolete. In such a case, assets are presented separately from regularly used fixed assets at lower net realizable or estimated salvage value under the balance sheet. Any profit or loss on such an event is transferred to P&L A/c.
Benefits of Fully Depreciated Assets
- It helps companies fairly state and examines the expense incurred by using an asset during an accounting period and matching the revenue generated during that period, eliminating the chances of understating or overstating total expenses.
- It also helps companies correctly report an asset’s net book value. The netbook value of an asset is the original purchase cost reduced by the accumulated depreciation of an asset.
- This helps to recover the asset’s original cost by utilizing the total depreciated value of an asset. Companies recover total asset costs through periodic depreciation expenses.
- Expenses charged as depreciation helps the companies in saving payable income tax. The more the depreciation expense, the lower the taxable income and hence more tax savings.
Conclusion
Fully depreciated assets are assets whose entire cost is written off or charged as an expense in multiple accounting periods per the guidelines provided by ruling GAAP. It may so happen that an asset, after fully depreciated, may still be in active use. This happens due to incorrect charging of yearly depreciation. An entity should wisely observe and apply depreciation accounting policy as policies may provide general criteria for charging depreciation, but situations may differ for each company.
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