Partial year depreciation

It is imprecise to take a full year's depreciation (the process of deducting the purchase price of a fixed asset over several accounting periods) when an asset has only been in service for part of a year. When a fixed asset (property used in a productive capacity which will benefit the enterprise for longer than one year) is acquired or disposed of mid-year, the full-year depreciation amount is prorated according to the amount of time the asset has been in service. There are several simplified conventions used to do this.

The convention you choose affects the amount of depreciation in the first and last accounting periods. In choosing a convention, consider these criteria:

• Which convention best links the expense with its associated revenues?
• Which convention is simplest to use?
• Is it advantageous to take more depreciation in the first year of service?
• Which convention is most closely associated with the date the asset was placed in service?

You can choose any convention, regardless of the date placed in service. Many companies choose the Full Year convention for simplicity. An accountant can help you decide which convention is best to use in your circumstances.

Conventions

Full Year

Record a full year's depreciation in the first year and none in the last.

Half Year

Record half of one year's depreciation in the first year and half in the last.

Full month

Depreciation is prorated according to the number of months in service during the year, including the month placed in service.

Half Month

Depreciation is prorated according to the number of months in service during the year. The month the asset is placed in service is included only if the placed-in-service date falls on or before the 15th.

Actual days

Depreciation is prorated according to the number of days in service during the year.