On the Balance Sheet, we classify assets as Current Assets and Non-Current Assets.
Current Assets are those that you plan to convert into cash in the current fiscal year or the next 12 months. These are assets which do not depreciate.
For instance, Inventory is a current asset and does not depreciate.
Non-Current Assets are held for the long term – that is at least the next 12 months and likely more.
Most Non-Current Assets qualify for depreciation, but not all.
In this article we will:
- define depreciation,
- understand what types of assets can be depreciated,
- review examples of non-current assets which cannot be depreciated
- and learn why they cannot be depreciated.
What is Depreciation?
Depreciation is the accounting practice of reducing an asset’s value in the books from one year to the next until the end of the asset’s useful life.
So, if you depreciate a $900 laptop over its useful life of 3 years, the depreciation amount per year will be $300.
What makes an asset depreciable?
For an asset to be depreciable all the following must be true:
- It must be used for business purposes
- It must be used for generating income
- It must have a useful life of greater than 12 months (i.e. it must be a Non-Current Asset)
- It must lose its value over its useful life
Examples of depreciable assets
Depreciable Assets are those which lose value over time, and which are held for the long term. The loss of value can be caused by wear and tear, usage, decay, obsolescence, etc.
Depreciable Assets include:
- and most fixed assets (except Land)
Intangible assets which also lose value over the long term are amortized. Amortizable assets include Software, Patents, Trademarks, Copyrights, etc.
Examples of assets that do not depreciate
Assets which do not depreciate are:
- Current Assets (Cash & Equivalents, Inventory, Receivables)
- Assets for personal use
- Assets for investment purposes only (and not for generating an income)
- Leased/Rental property
- Paintings, Sculpture, Art, Coins (and other collectibles)
- Low-cost items (these are typically expensed in the current fiscal year)
Land is not depreciated because it (usually) does not lose value and has an unlimited useful life.
Inventory also cannot be depreciated because it is a Current Asset that a business plans to convert into customer cash in the short term. But if inventory loses its value (eg if goods are damaged or have gone bad) it can be written-down or written-off.
Financial Assets, unlike most Real Assets, cannot be depreciated as they do not automatically lose value and are held as an investment and not for income generation.
Rental or leased property also cannot be depreciated. However, the cost of making long-term improvements to the property can be depreciated.
Low-cost items which are used in the current fiscal year (printer paper, pens, coffee, books, etc) are considered expenses in the fiscal year of their purchase and do not qualify for depreciation.
Assets which do not depreciate are either: (i) Current Assets or (ii) Non-Current Assets which do not generate an income or which do not lose value over time.
The most prominent assets which are not depreciated are inventory because it is a current asset and land because it does not lose value over time, and has an unlimited useful life.