Depreciating a Capital Asset

If you only read one thing Depreciation spreads an asset’s cost over its useful life, systematically. Land is the one major exception, it never depreciates, no matter how long you own it.

Builds on FM6.2 Acquisition sets the cost. Depreciation is what happens to that cost over the years that follow.

Why This Matters

Depreciation is where the biggest calculation mistake in this whole module happens, forgetting that land doesn’t depreciate, and overstating an expense as a result.

What’s Actually Going On

Depreciation systematically spreads an asset’s cost over its useful life, recognizing that buildings and equipment wear out and eventually need replacing. The most common method is straight-line: cost divided by useful life, recognized evenly each year.

Land is never depreciated. It doesn’t wear out or get used up the way a building or vehicle does, so it stays on the books at cost indefinitely, no matter how many decades a government owns it.

Here’s the calculation, worked through: a school building costs $2,000,000, has a useful life of 40 years, and no salvage value. Annual depreciation is $2,000,000 ÷ 40 years = $50,000 per year. If the land under that building cost $300,000 separately, that $300,000 never gets depreciated at all, it just sits on the books at cost.

How This Applies

Before calculating depreciation on any property that includes land, separate the land value out first. It’s the single easiest step to forget, and skipping it overstates the depreciation expense every year the mistake goes uncorrected.