Goods such as office equipment and office furniture depreciate in value over time because of wear, tear, and aging. In-kind donations that depreciate in value should be added to your organization’s depreciation schedule. An asset remains on a depreciation schedule until the asset becomes fully depreciated or is discarded.
A simple explanation for the process is below. Generally accepted accounting principles (GAAP) require a rational and systematic approach to depreciation, as well as consistent financial reporting. For more detailed guidance, speak with your accountant.
- The first step is to determine the current value of the good. For example, a computer purchased a year ago might have cost $650, but according to a sales representative at a local store that sells the current model of that computer, the current value of the year-old computer is $400.
- The second step is to determine the anticipated “useful life” of the computer. In the US, tax authorities have given computing hardware a prescribed depreciable life of five years. The computer was used for one year already, so it has a “useful life” of four years. The computer will depreciate in value from $400 to $0 during those four years. The resulting $0 value is because the asset has no residual value or in other words the asset could not be retired or scrapped for any value.
The simplest depreciation schedule is Straight Line Depreciation. This is when you spread the expenses evenly across an asset’s depreciable life. For the computer example, this would mean you would claim a $100 (Current Value of $400/Useful Life of 4 = $100) depreciation expense each year for 4 years. Other types of schedules have varying percentages for each year of depreciation.