What it means
Fixed assets are things the business buys to use for more than a year: servers, office furniture, lab equipment, sometimes laptops. Accountants also call them property and equipment. You buy them to use, not to resell, and they keep doing work for several years.
Which purchases count is set by your capitalization threshold, a dollar amount in your written policy. Below it, a purchase is expensed the month you buy it. Above it, the purchase is recorded as an asset.
The asset goes on the balance sheet at cost. From the date it's placed in service, meaning set up and ready to use, you book depreciation: a monthly expense that spreads the cost over the asset's useful life. Straight-line, the usual method, divides cost less any expected salvage value evenly across those months.
Depreciation builds up in a separate account called accumulated depreciation. Cost minus accumulated depreciation is net book value. That figure is an allocation of cost, not an estimate of what the equipment would sell for.
Acme buys $36,000 of servers and places them in service on January 1, with a three-year life and no salvage value. It books $1,000 of depreciation a month. After one year the register shows cost of $36,000, accumulated depreciation of $12,000 and net book value of $24,000.
If Acme sells the servers after two years for $10,000, the book value at that point is $12,000. Acme removes the cost and the accumulated depreciation from the books and records a $2,000 loss on the sale.
The purchase appears as an investing outflow on the cash flow statement, and depreciation is added back in the operating section because no cash moved. Leased equipment follows ASC 842 instead. The fixed-asset register should tie to the balance sheet at each close.
Why it matters. Write the threshold down once and every laptop gets booked the same way. A big hardware month stops distorting the P&L.
Try it with your numbers
Change any number. The working below updates as you type.
Monthly depreciation = (Cost − Salvage value) ÷ Useful life in months · Net book value = Cost − Accumulated depreciationNet book value after 12 months
$24,000.00
How it’s worked out
- 1Depreciable base$36,000.00 − $0.00$36,000.00
- 2Depreciation each month$36,000.00 ÷ 36$1,000.00
- 3Accumulated depreciation12 months$12,000.00
- 4Net book value$36,000.00 − $12,000.00$24,000.00
| Month | Depreciation | Accumulated | Net book value |
|---|---|---|---|
| Jan 2026 | $1,000.00 | $1,000.00 | $35,000.00 |
| Feb 2026 | $1,000.00 | $2,000.00 | $34,000.00 |
| Mar 2026 | $1,000.00 | $3,000.00 | $33,000.00 |
| Apr 2026 | $1,000.00 | $4,000.00 | $32,000.00 |
| May 2026 | $1,000.00 | $5,000.00 | $31,000.00 |
| Jun 2026 | $1,000.00 | $6,000.00 | $30,000.00 |
| Jul 2026 | $1,000.00 | $7,000.00 | $29,000.00 |
| Aug 2026 | $1,000.00 | $8,000.00 | $28,000.00 |
| Sep 2026 | $1,000.00 | $9,000.00 | $27,000.00 |
| Oct 2026 | $1,000.00 | $10,000.00 | $26,000.00 |
| Nov 2026 | $1,000.00 | $11,000.00 | $25,000.00 |
| Dec 2026 | $1,000.00 | $12,000.00 | $24,000.00 |
| Dec 2028 | $1,000.00 | $36,000.00 | $0.00 |
Net book value is an allocation of cost, not what the asset would sell for. Showing the first 12 of 36 months and the last one.
The entry, worked
Acme buys $36,000 of servers and places them in service on January 1. They have a three-year useful life and no salvage value, so straight-line depreciation is $1,000 a month.
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | $1,000.00 | |
| Accumulated depreciation | $1,000.00 | |
| Total | $1,000.00 | $1,000.00 |
Each month carries one thirty-sixth of the cost, and the servers' net book value drops by $1,000.
Common questions
Should laptops be capitalized or expensed?
It depends on your written capitalization threshold. Many startups set it high enough that ordinary laptops are expensed and larger hardware is capitalized.
Is book depreciation the same as tax depreciation?
Often not. Bonus depreciation is back at 100%, permanently, for property acquired after January 19, 2025, and the Section 179 limit for 2026 is $2,560,000. Tax often writes the whole cost off in year one while the books spread it, so the gap is tracked for the return.
Where does the $2,500 capitalization threshold come from?
It's the IRS de minimis safe harbor. With an annual election on the return, a business without audited statements can deduct items costing up to $2,500 per invoice or item, or $5,000 with an audited financial statement. Many startups set their book threshold to match.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- DepreciationSpreading the cost of a fixed asset over the periods it servesGlossary
- Why startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.Guide · 4 min
- Audit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.Guide · 4 min
- Form 1120: what to give your tax preparer, and whenWhat a startup hands its tax preparer for Form 1120: closed books, a balance sheet that ties to Schedule L, book-to-tax items, ownership and 1099s.Guide · 5 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- Adjusting entriesThree entries nobody sends an invoice for, made on the last day of the month, that turn a record of transactions into a set of accounts.Lesson 9
- The cash flow statementNorthwind earned $2,550 and its operations consumed $3,100. The third statement is the one that explains the difference, line by line.Lesson 12
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.