What Happens When an Asset Has Been Depreciated to Zero but Continues to Be Used

Definition of Fully Depreciated Assets

Fully depreciated assets can be defined as any long-term economic benefit generating resource, i.e. a plant, property or any other equipment whose entire book value has been written off or charged as expense over its useful life as depreciation or impairment loss (multiple accounting periods) in accordance with the applicable Generally accepted accounting principles guidelines which may or may not have left with physical existence.

Explanation

Any long-term asset is capitalized in books of accounts and is depreciated over a period of time; it is expected to generate economic benefits. This depreciation charges are in accordance with the matching principle, which matches revenue with related expenses incurred. Once the entire book balance of any asset is charged in Statement of Profit & loss as an expense, it leads to creating a fully depreciated asset, i.e. an asset that has completed its full useful life and the remaining that exists now is just its salvage value.

Salvage value is the remaining value or book value of an asset calculated after all depreciation has been charged. Salvage value is also known as terminal value or residual value. An asset reaches full depreciation when its usefulness is completed and the remaining part is of use only if the entity against its original cost provides the impairment charges.

Example of Fully Depreciated Assets

Consider a movers and packers company purchases truck for transportation. The initial value of a truck was $1,00,000 and useful life of 10. The salvage value of such transportation trucks is estimated to be $10,000, and the company uses the straight-line method of depreciation.

Here, the company subtracts the salvage value of zero from the $100000 initial value and divide by the useful life of ten years of the asset to arrive at its yearly depreciation, which is ($100000 – $10000 / 10 = $9000). After 10 years, the asset will become a fully depreciated asset as there will not be any further depreciable value left to charge as depreciation. Under such condition, the asset will be treated as a fully depreciated asset.

Accounting for Fully Depreciated Assets

The accounting for the fully depreciated asset is done through continuously reporting the cost and accumulated depreciation of an asset in the balance sheet. A fully depreciated asset will be reported in a balance sheet as follows:

• Cost: Complete utilization of the cost of the asset will be listed as a fixed assets item under the asset section of the balance sheet.
• Depreciation: The accumulated depreciation will be listed in the accumulated depreciation, contra asset column presented below the fixed asset column.

Until the asset is disposed of by either selling or scraping, no further accounting is required as no additional depreciation is required for that asset. A fixed asset is considered fully depreciated when it has charged the entire depreciable balance of that asset as an expense, i.e. original cost of an asset is reduced by salvage value matches with its total accumulated depreciation, or an impairment loss is charged on that asset. The absence of depreciation expense will reduce the amount of depreciation expense charged in the income statement, which increases the organisation's non-cash profits.

Such assets may have been retired from active use and usually shown at lower salvage value or net realizable value. Any profit or loss on such retiral will be immediately provided in books of accounts. If the underlying asset is still being used, it is incorrect to remove a fixed asset cost and accumulated depreciation from the accounting cost for two reasons.

Fully Depreciated Assets Journal Entry

Journal entry for fully depreciated assets are given below:

Example

Pass Accounting entry for disposal of the fully depreciated asset as of 31/12/2019 using the following Info.: –

1. Consider a cloth manufacturing company purchased a Machinery on 01/01/2010 for printing worth $2,10,000
2. The salvage Value expected was $10,000 as on 31/12/2019
3. The company uses the straight-line depreciation method

Pass entry in each of the following separate situations, company: –

• Didn't sold the asset, and NRV is expected to be $10,000 only,
• Sold machine for $8,000
• Sold machine for $20,000

Solution:

• Annual depreciation is $20,000 (2,10,000 – 10,000) / 10
• WDV of machine as on 31/12/2019 is $10,000 ($2,10,000 – $2,00,000)

Entries: If the company does not sell an asset, it will require no accounting entry, and the asset will be shown at $10,000(NRV) as of 31/12/2019.

• If the company sell an asset for $8,000:

Date	Particulars	Debit	Credit	In case the company does not maintain Acc. Dep. A/c
31-12-2019	Cash A/c                                            Dr.	8,000
	Loss on Sale of Machinery A/c	2,000
	To Machinery A/c		10,000
	(Being machine sold at a loss of 2,000)

Date	Particulars	Debit	Credit	In case the company maintains Acc. Dep. A/c
31-12-2019	Cash A/c                                            Dr.	8,000
	Loss on Sale of Machinery A/c      Dr.	2,000
	Acc. Depreciation A/c                     Dr.	2,00,000
	To Machinery A/c		2,10,000
	(Being machine sold at a loss of 2,000)

• Sold for 20,000

Date	Particulars	Debit	Credit	In case the company does not maintain Acc. Dep. A/c
31-12-2019	Cash A/c                                            Dr.	8,000
	To Machinery A/c		10,000
	To Profit on Sale of Machinery A/c		10,000
	(Being machine sold at a loss of 2,000)

Date	Particulars	Debit	Credit	In case the company maintains Acc. Dep. A/c
31-12-2019	Cash A/c                                            Dr.	20,000
	Acc. Depreciation A/c                     Dr.	2,00,000
	To Machinery A/c		2,10,000
	To Profit on Sale of Machinery A/c		10,000
	(Being machine sold at a loss of 2,000)

Fully Depreciated Assets on Balance Sheet

Fully depreciated assets that are actively used are reported at a cost under the Plant, Property, and Equipment section of the balance sheet. Under the same section, accumulated depreciation is also reported, which results in net written down value. This net amount is carrying value or written down value. The carrying value is determined when the accumulated depreciation is subtracted from the combination of these assets. Depreciation and the cost of the asset will be reported until the company fully disposes of the asset.

The disposal can be done either through sale, scrap, or transfer. Usually, such assets may form part of assets retired from active use as they are either no more useful or have become obsolete. In such a case, assets are presented under the balance sheet separately from regularly used fixed assets at lower net realizable value or estimated salvage value. Any profit or loss on such an event is transferred to P&L A/c.

Benefits of Fully Depreciated Assets

• It helps companies to fairly state and examine the amount of expense incurred by using an asset during an accounting period and match the revenue generated during that period, which eliminates the chances of understating or overstating total expenses.
• It also helps companies to report the net book value of an asset correctly. The netbook value of an asset is the original purchase cost reduced by accumulated depreciation of an asset.
• This helps to recover the asset's original cost by utilizing the total depreciated value of an asset. Companies recover total asset cost through periodic depreciation expense.
• Expenses charged as depreciation helps the companies in saving payable income tax. The more the depreciation expense, the lower is the taxable income and hence more tax saving.

Conclusion

Fully depreciated assets are assets whose entire cost is written off or charged as an expense in multiple accounting periods as per the guidelines provided by ruling GAAP. It may so happen that an asset, after getting fully depreciated, may still be in active use. This happens due to incorrect charging of yearly depreciation. An entity should wisely observe and apply depreciation accounting policy as policies may provide general criteria for charging depreciation, but situations may be different for each company.

Recommended Articles

This is a guide to Fully Depreciated Assets. Here we also discuss the definition and accounting for fully depreciated assets along with advantages and disadvantages. You may also have a look at the following articles to learn more –

1. Short Term Assets
2. Assets Example
3. Types of Assets
4. Financial Assets Types

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