Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Fully Depreciated Asset

What it is:

With a fully depreciated asset, the accumulated depreciation equals the original cost of the asset.

How it works (Example):

Let's assume Company XYZ bought a MegaWidget for $100,000 10 years ago. The MegaWidget depreciates by $10,000 a year. Thus the accumulated depreciation recorded for the MegaWidget is:

Accumulated depreciation = $10,000 (year 1 depreciation) + $10,000 (year 2 depreciation) + $10,000 (year 3 depreciation) + $10,000 (year 4 depreciation) + $10,000 (year 5 depreciation) + $10,000 (year 6 depreciation) + $10,000 (year 7 depreciation) + $10,000 (year 8 depreciation) + $10,000 (year 9 depreciation) + $10,000 (year 10 depreciation) = $100,000.

Company XYZ will then record the net book value of the MegaWidget like this:
Net book value = $100,000 purchase price - $100,000 accumulated depreciation = $0. In other words, the asset is fully depreciated.

Why it Matters:

Depreciation is a key component of the balance sheet, and it is a key component of net book value. Net book value is the value at which a company carries an asset on its balance sheet. It is equal to the cost of the asset minus accumulated depreciation. When an asset is fully depreciated, it is worth nothing for accounting purposes, though the asset might actually have some scrap or minimal resale value. The method a company uses to calculate depreciation can influence when an asset becomes fully depreciated.

The disparity highlights one very important aspect of accumulated depreciation: It does not reflect true losses in the market value of an asset (or company).