Depreciation Schedule

A depreciation schedule is the asset-by-asset record behind a single line in the financial statements. For each capitalized asset it carries a description and identifier, the date placed in service, the capitalized cost, any salvage value, the method, the useful life or recovery period, the convention, accumulated depreciation at the start of the period, the current period expense, accumulated depreciation at the end, and the resulting net book value. Disposals carry a date, proceeds, and the gain or loss.

Most organizations need two of them. The book schedule uses management's estimate of useful life and typically straight-line depreciation, because that is what GAAP asks for. The tax schedule uses statutory recovery periods and conventions under MACRS, plus whatever bonus depreciation and Section 179 expensing apply, because that is what the code prescribes. The two produce different numbers for the same asset every year of its life, and the running difference is a temporary book-tax difference that feeds the deferred tax computation. Maintaining one schedule and deriving the other by adjustment is how groups end up unable to explain either.

The schedule has to tie in two directions each period. Forward, the current period expense must agree to the depreciation expense posted in the general ledger, and ending accumulated depreciation must agree to the accumulated depreciation account on the balance sheet. Backward, each asset must trace to an invoice or capitalization document supporting its cost and in-service date. A rollforward makes both testable: opening net book value, plus additions, less disposals, less current depreciation, equals closing net book value.

Tie-out finds the same handful of problems repeatedly. Assets disposed of physically but never removed from the schedule, quietly depreciating for years. Construction in progress that was placed in service and never transferred out of the holding account, so nothing has been depreciating at all. Additions capitalized to the wrong class, which changes the life and the convention. Fourth-quarter additions large enough to trigger the mid-quarter convention, which changes the deduction for every asset placed in service that year. Short tax years that require proration. Fully depreciated assets still carried at cost with equal accumulated depreciation, which is correct but clutters the schedule and hides the real disposals. And the split between capitalized improvements and repairs, which is a judgment that should be documented rather than inferred from the amount.

Where a cost segregation study has been performed, the schedule is the deliverable that has to absorb it: components reclassified into shorter recovery periods, with the reclassification traceable to the study, and often a method change on Form 3115 to pick up the catch-up depreciation.

Related terms: Cost Segregation Study, Form 4562, General Ledger, Book-Tax Differences

Related skill: Depreciation tie-out

Tying a fixed asset schedule to the ledger and to the return is mechanical, repetitive, and unforgiving of a single missed disposal. Adopt's agents run the rollforward, reconcile both directions, and document each exception. Sign up free.