Depreciation

Question: Monitoring the specific days on which depreciable assets are bought and sold seems like a tedious process. Do companies use a simpler method for assigning depreciation when a piece of property or equipment is

held for less than a full year?

Answer: Most companies hold many depreciable assets, often thousands. Depreciation is nothing more than a

mechanical cost allocation process. It is not an attempt to mirror current value. Consequently, company officials

often prefer not to invest the time and effort needed to keep track of the specific number of days or weeks of

an asset’s use during the years of purchase and sale. As a result, depreciation is often calculated to the nearest

month when one of these transactions is made. A full month of expense is recorded if an asset is held for fifteen

days or more whereas no depreciation is recognized in a month where usage is less than fifteen days. No genuine

informational value comes from monitoring the depreciation of assets down to days, hours, and minutes. An

automobile acquired on March 19, for example, is depreciated as if bought on April 1. A computer sold on

November 11 is assumed to have been used until October 31.

As another accepted alternative, many companies apply the half-year convention (or some variation). When

property or equipment is owned for any period less than a full year, a half year of depreciation is automatically

assumed. Maintenance of exact records is not necessary. Long-lived assets are typically bought and sold at various

times throughout each period so that, on the average, one-half year is a reasonable assumption. As long as such

approaches are applied consistently, reported figures are viewed as fairly presented. Property and equipment

bought on February 3 or sold on November 27 is depreciated for exactly one-half year in both situations.

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