# Fixed assets and depreciation

> A capitalization policy, two October purchases on either side of it, the van's schedule over its whole life, and what selling it does to the books.

Source: https://lopifi.com/learn/fixed-assets-and-depreciation
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**When should a startup capitalize a purchase, and how does depreciation work?** A capitalization policy, two October purchases on either side of it, the van's schedule over its whole life, and what selling it does to the books.

The van is Northwind's only [fixed asset](https://lopifi.com/md/glossary/fixed-asset) in September: $24,000 of cash that became a vehicle, a [capital expenditure](https://lopifi.com/md/glossary/capital-expenditure) rather than an expense. That's [Capitalization](https://lopifi.com/md/glossary/capitalization): recording a cost as an asset because it will serve future periods, then charging it to them through [Depreciation](https://lopifi.com/md/glossary/depreciation). October brings the question every company meets in its first month of buying things: where is the line?

## Capitalize or expense

GAAP doesn't draw it in dollars. A laptop that lasts three years is, in principle, a fixed asset. But the Codification says its own provisions need not be applied to immaterial items, so a company sets a [capitalization threshold](https://lopifi.com/md/glossary/capitalization-threshold) and expenses everything below it. Northwind's is $2,500 and a useful life over a year.

> “The provisions of the Codification need not be applied to immaterial items.”

© Financial Accounting Foundation. All rights reserved.

— [ASC 105-10-05-6](https://asc.fasb.org/105/tableOfContent), Immaterial items — why a capitalization threshold is allowed at all

Northwind didn't pick $2,500 at random. The IRS lets a business elect a [de minimis safe harbor](https://lopifi.com/md/glossary/de-minimis-safe-harbor) and deduct items up to $2,500 per invoice or item, or $5,000 if it has an applicable financial statement, such as an audited one, provided its books expense them too. Matching the book policy to the safe harbor keeps the two sets of numbers agreeing on the small things. The election is made by a statement attached to the return, for each year it's wanted.

> “If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).”

— [IRS — Tangible Property Final Regulations, de minimis safe harbor (Treas. Reg. §1.263(a)-1(f))](https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations), The de minimis safe harbor for small tangible property

| Rule | Northwind |
| --- | --- |
| Threshold | $2,500 per item or invoice, and a useful life over twelve months |
| Cost includes | Price, sales tax, freight, installation and testing — everything to make it ready for use |
| Method | Straight-line, a full month in the month it goes into service, no salvage unless stated |
| Useful lives | Vehicles 48 months; store fixtures 60 months |
| Below the threshold | Expensed when bought, whatever the life |

Northwind's capitalization policy, as written.

**Northwind — Two purchases, either side of the line.** On October 1 Northwind buys stockroom shelving for $4,800 and pays $300 to have it installed. On October 2 it buys a $1,400 laptop for the counter. Both will last years. One is a fixed asset and the other an expense, and the policy decides which.

The installation is part of the shelving's cost. Getting an asset ready for its intended use is part of what it cost, so the asset is $5,100, not $4,800, and it depreciates at $85 a month for sixty months.

> “The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use.”

© Financial Accounting Foundation. All rights reserved.

— [FASB Statement No. 34, ¶6 (codified in ASC 835-20)](https://storage.fasb.org/fas34.pdf) (PDF), An asset's cost includes what it took to get it ready for use

**Wrong:** Dr 1510 Store fixtures 4,800
Dr 6700 Equipment expense 300
   Cr 2000 Accounts payable 5,100

**Right:** Dr 1510 Store fixtures 5,100
   Cr 2000 Accounts payable 5,100

Expensing the installation understates the asset and overstates October's expenses. The cost of getting an asset working is part of the asset.

**Exercise — Capitalize, expense or prepay.** Northwind capitalizes a purchase that costs at least $2,500 and serves more than a year, and expenses anything smaller. A cost paid ahead for a service is a prepaid. Decide each one. Type it in the workbook at https://lopifi.com/playground.

## The van, over its whole life

| Month | Depreciation | Accumulated | Net book value |
| --- | --- | --- | --- |
| September 2026 | 500 | 500 | 23,500 |
| October 2026 | 500 | 1,000 | 23,000 |
| November 2026 | 500 | 1,500 | 22,500 |
| December 2026 | 500 | 2,000 | 22,000 |
| December 2027 | 500 | 8,000 | 16,000 |
| December 2028 | 500 | 14,000 | 10,000 |
| December 2029 | 500 | 20,000 | 4,000 |
| August 2030 | 500 | 24,000 | 0 |

The van's schedule, first months and year ends. Row 1 is AJE-2. Forty-eight rows, summing to exactly $24,000.

*[Figure: depreciation]*

The van at its own figures: $24,000, straight-line over four years from September 2026, no salvage.

Each month's credit goes to [accumulated depreciation](https://lopifi.com/md/glossary/accumulated-depreciation), never to the van itself, so the balance sheet keeps the cost and shows how much of it is used up. The [net book value](https://lopifi.com/md/glossary/net-book-value) is the difference. If the [useful life](https://lopifi.com/md/glossary/useful-life) or [salvage value](https://lopifi.com/md/glossary/salvage-value) turns out wrong, the remaining schedule is re-spread from that month on; the months already closed stay as they were.

> **A fixed asset is cost waiting to become expense. The policy decides what goes in, the schedule decides when it comes out, and a sale settles the rest as a gain or a loss.**

In this lesson: how to choose a depreciation method, and what happens when the van is eventually sold, each have their own page below.

## Pages in this lesson

- [Depreciation methods](https://lopifi.com/md/learn/fixed-assets-and-depreciation/depreciation-methods) — 4 min. Which depreciation method should a startup use, and why does tax depreciation differ?
- [Selling a fixed asset](https://lopifi.com/md/learn/fixed-assets-and-depreciation/selling-a-fixed-asset) — 4 min. How do you record the sale of a fixed asset?

## Where this lesson's rules come from

- [ASC 105-10-05-6](https://asc.fasb.org/105/tableOfContent) — Immaterial items — why a capitalization threshold is allowed at all (codification)
- [IRS — Tangible Property Final Regulations, de minimis safe harbor (Treas. Reg. §1.263(a)-1(f))](https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations) — The de minimis safe harbor for small tangible property (irs)
- [FASB Statement No. 34, ¶6 (codified in ASC 835-20)](https://storage.fasb.org/fas34.pdf) (PDF) — An asset's cost includes what it took to get it ready for use (standard)
- [ASC 360-10-35-4](https://asc.fasb.org/360/tableOfContent) — Depreciation allocates cost; it does not measure value (codification)
- [ASC 250](https://asc.fasb.org/250/tableOfContent) — Accounting Changes and Error Corrections (codification)
- [Wikipedia, “Fixed asset”](https://en.wikipedia.org/wiki/Fixed_asset) — Fixed asset (reference)
- [Wikipedia, “Depreciation”](https://en.wikipedia.org/wiki/Depreciation) — Depreciation (reference)
- [Wikipedia, “Capital expenditure”](https://en.wikipedia.org/wiki/Capital_expenditure) — Capital expenditure (reference)

## Read further

- https://lopifi.com/md/journal-entries/equipment-purchase
- https://lopifi.com/md/journal-entries/depreciation
- https://lopifi.com/md/journal-entries/asset-disposal
- https://lopifi.com/md/differences/capex-vs-opex
- https://lopifi.com/md/differences/depreciation-vs-amortization
- https://lopifi.com/md/accounting/fixed-assets
- https://lopifi.com/md/tools/depreciation
- https://lopifi.com/md/docs/domain/04-schedules-and-accruals

- **Track:** [Accounting](https://lopifi.com/md/learn/accounting)
- **Lesson:** Lesson 16 of 17 — 9 min
- **Terms taught:** [Fixed asset](https://lopifi.com/md/glossary/fixed-asset), [Capitalization](https://lopifi.com/md/glossary/capitalization), [Capitalization threshold](https://lopifi.com/md/glossary/capitalization-threshold), [Capital expenditure](https://lopifi.com/md/glossary/capital-expenditure), [De minimis safe harbor](https://lopifi.com/md/glossary/de-minimis-safe-harbor), [Depreciation](https://lopifi.com/md/glossary/depreciation), [Accumulated depreciation](https://lopifi.com/md/glossary/accumulated-depreciation), [Net book value](https://lopifi.com/md/glossary/net-book-value), [Useful life](https://lopifi.com/md/glossary/useful-life), [Salvage value](https://lopifi.com/md/glossary/salvage-value), [Straight-line](https://lopifi.com/md/glossary/straight-line), [Gain or loss on disposal](https://lopifi.com/md/glossary/gain-or-loss-on-disposal), [Temporary difference](https://lopifi.com/md/glossary/temporary-difference)
- **Previous:** [Prepaid and accrual schedules, Accounting · Lesson 15](https://lopifi.com/md/learn/prepaid-and-accrual-schedules)
- **Next:** [Depreciation methods](https://lopifi.com/md/learn/fixed-assets-and-depreciation/depreciation-methods)
- **The course:** https://lopifi.com/md/learn