Managing By The Numbers: A Commonsense Guide To Understanding And Using Your Company's Financials

by Chuck Kremer

Depreciation is simply a way of spreading the cost of an asset over a certain number of years, with the time span roughly corresponding to the useful life of the asset. Accumulated depreciation is just a way of showing how much of the cost has been allocated to prior years. An example should clarify this idea. Say you run a flower shop, and you bought a delivery truck three years ago for $25,000. The entire $25,000 is included in the gross fixed assets line of your balance sheet because that’s what you paid for the truck (its historical cost). But by now, the truck is three years old, and its value has declined. Each year, your accountant has listed a portion of the truck’s price as an expense on your income statement and is said to have depreciated it (more on this in the next chapter). The accumulated depreciation line on the balance sheet shows the total cumulative depreciation over the three years since you bought the truck. So why is SOHO Equipment’s accumulated depreciation zero? Simple: when business assets are sold to a new owner, their “fair” value is refigured as of the date of the sale. That becomes the new gross fixed assets figure, and the new owner begins depreciation all over again.