Asset Depreciation - How to Calculate and Record It Correctly

Complete Guide to Asset Depreciation

Depreciation is the systematic allocation of an asset's acquisition cost to expenses over its useful life. Proper depreciation is crucial for tax returns, accurate accounting and effective asset management. In this article, we explain everything you need to know about depreciation - from basic concepts through depreciation methods to practical tips for automation.

$3,500

typical threshold for depreciating tangible assets

depreciation groups by law

3-50 years

depreciation period by group

tax depreciation methods

Basic Concepts

Before diving into details, it's important to understand the basic concepts related to depreciation:

Depreciation

Amount expressing asset wear for a specific period. Reduces asset value in accounting and enters as expense.

Accumulated Depreciation

Sum of all depreciation to date. Expresses total asset wear since acquisition.

Book Value

Acquisition cost minus accumulated depreciation. Shows the current accounting value of the asset.

Useful Life

Number of years over which an asset is depreciated. For tax depreciation, it's determined by law based on depreciation group.

Tax vs Accounting Depreciation

In accounting practice, we distinguish two types of depreciation that serve different purposes and follow different rules:

Tax Depreciation

Based on income tax law. Affects the tax base and has strictly defined calculation rules.

+Reduces tax base
+Clearly defined rules
-Doesn't reflect actual wear

Accounting Depreciation

Governed by accounting standards and should reflect actual asset wear. The entity sets it based on expected useful life.

+True picture of reality
+Flexibility in settings
-Doesn't affect tax base

Depreciation Groups

Tax law divides tangible assets into 6 depreciation groups based on asset type. Each group has a defined minimum depreciation period:

Group	Depreciation Period	Asset Examples
1. skupina	3 roky	Computers, phones, office equipment, tools
2. skupina	5 let	Furniture, passenger cars, machinery, devices
3. skupina	10 let	Air conditioning, elevators, safes, turbines
4. skupina	20 let	Wooden and plastic buildings, fencing
5. skupina	30 let	Brick buildings, roads, bridges
6. skupina	50 let	Administrative buildings, hotels, shopping centers

Important: Tangible assets are typically depreciated from a certain threshold (varies by jurisdiction). Assets below this threshold can be expensed immediately.

Depreciation Methods

For tax depreciation, you can choose one of two methods. The choice is final and cannot be changed during depreciation:

Straight-Line Depreciation

Approximately the same amount is depreciated each year. Simpler to calculate, but less advantageous from a tax perspective in early years.

Depreciation = Cost × Annual Rate / 100

Example:

Laptop for $4,000 (Group 1): Year 1: 20%, next years 40% → depreciation $800 and 2× $1,600

Accelerated Depreciation

More is depreciated in early years, less later. More advantageous for tax optimization - reduces tax base faster.

Year 1: Cost / Coefficient, Other years: 2 × Book Value / (Coef. - Years elapsed)

Example:

Laptop for $4,000 (Group 1): Year 1: $1,333, Year 2: $1,778, Year 3: $889

Comparing Depreciation Methods

Aspect	Straight-Line	Accelerated
First year depreciation	Lower	Higher
Tax optimization	Less advantageous	More advantageous
Calculation complexity	Simpler	More complex
Suitable for	Stable companies	Growing companies

Common Depreciation Mistakes

Organizations often make these depreciation mistakes:

!Incorrect classification into depreciation group - may lead to tax penalties
!Forgetting to start depreciation in the month of placing into service
!Incorrect calculations due to inaccurate Excel formulas
!Depreciating assets below the threshold (can be expensed immediately)
!Not tracking fully depreciated assets - still in records but zero value

Learn more about risks of manual Excel tracking in our article: Asset Management in Excel vs. Specialized Software

Automating Depreciation in Software

Manual depreciation calculation is laborious and error-prone. Specialized software like Asset Manager automates the entire process:

Automatic Calculation

Software automatically calculates tax and accounting depreciation according to current legislation. Just enter the cost and depreciation group.

End-of-Depreciation Alerts

System alerts you when an asset is nearing full depreciation or when annual depreciation is due.

Print Reports

Depreciation summaries by period, depreciation schedules, asset cards with depreciation - all ready for accounting and audits.

Legislation Updates

When legal rates change, software updates automatically. No need to track changes and manually recalculate.

Depreciation Checklist

Use this checklist for proper depreciation management in your organization:

Asset Depreciation Checklist:

☐Verify correct depreciation group classification
☐Confirm acquisition cost exceeds threshold
☐Choose depreciation method (straight-line/accelerated)
☐Start depreciation in month of placing into service
☐Track tax and accounting depreciation separately
☐Monitor fully depreciated assets

Frequently Asked Questions

From what amount is an asset depreciated?

The depreciation threshold varies by jurisdiction. In the Czech Republic, tangible assets are tax depreciated from CZK 80,000 (since 2021). Assets below this threshold can be expensed immediately as minor tangible assets.

Can I change the depreciation method?

No, the depreciation method cannot be changed during depreciation. The choice between straight-line and accelerated depreciation is final and applies for the entire depreciation period of that asset.

When to start depreciation?

Depreciation starts in the month when the asset was placed into service (not the purchase month). The first depreciation is taken for the full year, regardless of the month of placement.

What about fully depreciated assets?

Fully depreciated assets remain in records with zero book value until physically disposed. They're still subject to inventory and have record-keeping value.

How is capital improvement calculated?

Capital improvements (modernization, reconstruction) above the annual threshold increase the asset's cost basis. Depreciation is then recalculated from the new basis for the remaining depreciation period.

Conclusion

Proper depreciation management is a legal obligation for every organization and has significant impact on tax base and accurate accounting. Automation through specialized software eliminates errors and saves time. Asset Manager automatically calculates depreciation according to current legislation and ensures you never miss important deadlines.

Automate Depreciation Calculation

With Asset Manager app, you don't need to worry about depreciation calculations. The system calculates everything automatically according to current legislation and alerts you to important deadlines.

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