In a previous video, we looked at how a capitalization policy works in an organization. That document states that any item purchased over a certain value is considered a fixed asset. A depreciable life policy takes the capitalization policy a step further. Once you’ve determined what a fixed asset is, the depreciable life policy sets the ground rules for how you will depreciate the asset and what the time period will be.
Let’s say your capitalization policy states any item purchased and valued at over $2,000 is a fixed asset. So, for example, you buy a computer for $2,500. Since you purchased it for more than $2,000, the computer is now a fixed asset, which means you need to track that asset and record its depreciation in the accounting.
The IRS and GAAP have set certain standards for the length of time you should depreciate categories of fixed assets. But there are many ways to depreciate a fixed asset. These methods include straight-line and declining balance, among others. For the sake of simplicity, we’ll use the straight-line depreciation method to show you how to depreciate the computer. With this method, you can spread the cost of the item out evenly. If you’d like to learn more about how a depreciable life policy would work in your organization, we’ve outlined various methods of depreciation in our free eBook on fixed assets.