People often use the terms fixed assets and depreciable assets interchangeably. Indeed, many times the two terms refer to the same assets, as accountants depreciate most fixed assets. However, the two terms have different implications when it comes to financial reporting and tax liability. Some fixed assets m can't be depreciated.
Fixed Asset Features
A business has several different types of assets. Fixed assets refer to tangible items that the business uses to generate value. The business does not sell fixed assets in its normal operations, but uses them to produce or provide its products. The business can't consume fixed assets, which remain useful for at least one year. Various businesses may have different guidelines when categorizing items as fixed assets. For example, a business can choose to only consider an item a fixed asset if its value exceeds $5,000.
Depreciable Asset Features
Depreciable assets refer to fixed assets that deteriorate and lose value over time. The depreciation process takes into account the useful life of a fixed asset, and reports the expense of such an asset over time. For example, when a business buys paper clips for the office, it would report the expense in the same year. When a business buys a fixed asset, such as a computer, it would report a portion of the expense every year over its useful life.
On the financial statements, fixed assets, both depreciable and non-depreciable, appear on the balance sheet, and there is no differentiation between the two. To check for depreciation, look at the income statement, which details a business' revenues and expenses. Depreciation would appear under expenses. The income statement details the items the business depreciates. Comparing the fixed items in the balance sheet and the depreciated items in the income statement helps determine which fixed assets are depreciable.
Some fixed assets are not depreciable because they don't deteriorate over time. A common non-depreciable asset is land. While land has a long useful life and generates value for the business, it generally does not lose value over time. When a business sells land, it recovers the cost it paid at purchase. A business also can't depreciate the costs of improving real property, but these costs help reduce tax liability when the business sells the property.
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