A fixed asset is something your company buys and uses for more than a year: a laptop, a server, a piece of equipment, a build-out. It goes on the balance sheet when you buy it and becomes an expense gradually, as depreciation, over the years you use it. Booking it all as an expense on the day of purchase makes that month look worse than it was and every later month look better.
The short answer
- Capitalize a purchase when it lasts more than a year and costs more than your capitalization threshold. Expense everything else.
- Depreciate a capitalized asset by spreading its cost, less any expected resale value, over its useful life. Straight-line is the usual method: the same amount every month.
- Keep a register of every asset with its cost, date, useful life and accumulated depreciation, and make sure it ties to the balance sheet each month.
- Record a sale or disposal by removing the asset and its accumulated depreciation and booking the gain or loss.
- Tax depreciation is a separate calculation and can be faster than the books. Ask your tax preparer.
What to capitalize and what to expense
| Purchase | Usual treatment | Why |
|---|---|---|
| A $2,400 laptop | Capitalize, unless it is below your threshold | Used for several years |
| A $9,000 piece of equipment | Capitalize | Used for years, well above any common threshold |
| A $200 office chair | Expense | Below the threshold, so the effort to track it exceeds the benefit |
| Office build-out or leasehold improvements | Capitalize | Benefits several years, depreciated over the shorter of the lease and the useful life |
| Repairs and maintenance that keep an asset working | Expense | Does not extend its life or add capacity |
| A major upgrade that extends life or adds capacity | Capitalize | Adds value to the asset beyond keeping it running |
| A software subscription | Expense (or a prepaid, if paid for a year ahead) | A service, so no asset is acquired |
| A domain name or trademark you buy | Capitalize as an intangible asset | Lasts more than a year |
Set a capitalization threshold
A capitalization threshold is the dollar amount above which a purchase is treated as an asset. Below it, even a long-lived item is expensed. Small companies commonly set it somewhere between $500 and $2,500. The right number is the one you will apply the same way every time, so write it down in a short accounting policy.
What goes into an asset’s cost
The cost is everything needed to buy it and get it ready for use: the purchase price, sales tax, delivery, and installation or setup. A $9,000 machine with $500 of freight and $500 of installation has a cost of $10,000. The depreciation starts when it is ready for use.
A worked example: straight-line depreciation
Your company buys a machine on January 1 for $9,000. You expect to use it for 5 years, then sell it for about $1,000. Straight-line depreciation spreads the cost less that resale value over the 5 years: ($9,000 minus $1,000) divided by 5 is $1,600 a year, or $133.33 a month.
| Depreciation expense | Accumulated depreciation | Book value (cost less accumulated) | |
|---|---|---|---|
| Purchase date | $0 | $0 | $9,000 |
| After month 1 | $133.33 | $133.33 | $8,866.67 |
| After year 1 | $1,600 | $1,600 | $7,400 |
| After year 3 | $1,600 a year | $4,800 | $4,200 |
| After year 5 | $1,600 a year | $8,000 | $1,000 |
| When | Debit | Credit |
|---|---|---|
| Purchase, January 1 | Equipment (asset) 9,000 | Cash 9,000 |
| Each month | Depreciation expense 133.33 | Accumulated depreciation (contra asset) 133.33 |
Accumulated depreciation sits against the asset on the balance sheet and reduces its book value. The asset’s cost stays on the books at $9,000 until you dispose of it.
Useful life
Useful life is how long you expect to use the asset, not how long it physically lasts. It is a judgment that goes in your policy. These are common choices, not rules:
| Asset | Common useful life |
|---|---|
| Computers and laptops | 3 to 5 years |
| Office furniture | 5 to 7 years |
| Equipment and machinery | 5 to 10 years |
| Vehicles | 5 years |
| Leasehold improvements | The shorter of the lease term and the useful life |
| Purchased software and websites | 3 to 5 years |
Recording a sale or disposal
When you sell or scrap an asset, remove its cost and its accumulated depreciation, record what you received, and book the difference as a gain or loss. Take the machine above, sold at the end of year 3 for $5,000. Its book value is $4,200, so the sale produces a gain of $800.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Accumulated depreciation | 4,800 | |
| Equipment | 9,000 | |
| Gain on disposal | 800 |
An asset sold for less than its book value produces a loss. An asset that is scrapped for nothing has a loss equal to its remaining book value. Depreciate it through the date of disposal, then record the entry.
Intangible assets work the same way, with amortization
An intangible asset has no physical form: a purchased trademark, a domain name, a customer list acquired in a purchase of a business, or software you build for your own use. When it has a limited life, its cost is spread over that life, and the expense is called amortization. An intangible with no limited life is not amortized and is reviewed for impairment each year.
- Purchased intangibles are capitalized at cost and amortized over their useful life.
- Software built for your own use can have some costs capitalized once development moves past the planning stage, and a SaaS subscription you pay for is an expense. The rules depend on the facts, so ask your CPA about substantial development spending.
- Brands and goodwill you build yourself are not recorded as assets. They are expensed as incurred.
Book depreciation and tax depreciation differ
The books and the tax return can use different methods. Tax rules allow some purchases to be deducted faster, through provisions such as Section 179 expensing and bonus depreciation, subject to limits that change from year to year. A company can depreciate an asset straight-line on its books and faster on its return. The difference is tracked by the tax preparer, and it does not change your books.
Why it matters
- Profit looks right. Expensing a $9,000 machine in one month wipes out that month’s profit and flatters the next 59.
- The balance sheet shows what you own. Lenders and investors read assets and book value from it.
- EBITDA depends on it. Depreciation and amortization are the D and A in EBITDA, so they have to be recorded to be added back.
- Diligence checks the register. A buyer or investor asks for a fixed asset schedule that ties to the balance sheet, and rebuilding it later is slow.
Common mistakes
- Expensing a large equipment purchase on the day it is bought.
- Capitalizing every small purchase and filling the register with $60 items.
- Letting depreciation run past the end of the useful life, or never starting it.
- Forgetting to record a sale or disposal, so the books show an asset the company no longer owns.
- Capitalizing a repair that only kept an asset working.
- Keeping the register in a spreadsheet that does not tie to the balance sheet.
- Using a different useful life for identical assets.
How Numbrr handles it
On Numbrr One and above, you set a capitalization threshold, and Numbrr flags purchases from your bank feed that are above it. You capitalize the ones that qualify, and monthly straight-line depreciation posts itself from then on. Disposals are recorded with their gain or loss, and there is a full asset register and a depreciation schedule. Intangible assets have their own accounts for cost, accumulated amortization and amortization expense. If you import from QuickBooks Online, assets found in the imported ledger are proposed for your review. See how it works.
You and your CPA still choose the policy: the threshold, the useful lives and the first-month convention. Numbrr applies it the same way every month. Numbrr works for US companies in US dollars. It keeps accrual-basis books, so read cash vs accrual accounting for startups if you are moving off cash, and the month-end close checklist for where depreciation fits in the close.
What is the difference between capitalizing and expensing?
Expensing records a cost on the income statement when you incur it. Capitalizing records it as an asset on the balance sheet and moves it to expense gradually, as depreciation, over its useful life. Long-lived purchases above your threshold are capitalized.
What is a good capitalization threshold for a small company?
Small companies commonly choose a number between $500 and $2,500. The best threshold is one written in your policy and applied the same way every time. The IRS de minimis safe harbor, which allows deducting items up to $2,500 per invoice or item without an audited financial statement, is a reference point for the tax return.
How do you calculate straight-line depreciation?
Subtract the expected resale value from the cost, then divide by the useful life. A $9,000 asset with a $1,000 resale value and a 5-year life depreciates by $1,600 a year, or $133.33 a month.
What happens to an asset when you sell it?
Remove its cost and its accumulated depreciation, record the cash received, and book the difference as a gain or a loss. If the sale price is above book value, there is a gain. If it is below, there is a loss.
What is the difference between depreciation and amortization?
Both spread an asset’s cost over its useful life. Depreciation applies to physical assets such as equipment, and amortization applies to intangible assets such as a purchased trademark or domain name.
Is a software subscription a fixed asset?
No. A subscription is a service, so it is an expense, or a prepaid expense if you pay a year ahead. Purchased software and some costs of building software for your own use can be capitalized, depending on the facts.
Does Numbrr track fixed assets and depreciation?
Yes, from Numbrr One. You set a capitalization threshold, Numbrr flags candidates from the bank feed, and monthly straight-line depreciation posts automatically once you capitalize an asset. It records disposals with gain or loss and keeps an asset register and a depreciation schedule, with accounts for intangibles and their amortization.