What Is a Fully Depreciated Asset?
A fully depreciated asset is a property, plant or piece of equipment (PP&E) which, for accounting purposes, is worth only its salvage value. Whenever an asset is capitalized, its cost is depreciated over several years according to a depreciation schedule. Theoretically, this provides a more accurate estimate of the true expenses of maintaining the company's operations each year.
Understanding Fully Depreciated Asset
An asset can reach full depreciation when its useful life expires or if an impairment charge is incurred against the original cost, though this is less common. If a company takes a full impairment charge against the asset, the asset immediately becomes fully depreciated, leaving only its salvage value. The depreciation method can take the form of straight-line or accelerated (double-declining-balance or sum-of-year), and when accumulated depreciation matches the original cost, the asset is now fully depreciated on the company's books.
In reality, it is difficult to predict the useful life of an asset, so depreciation expenses represent only a rough estimate of the true amount of an asset used up each year. Conservative accounting practices dictate that when in doubt, it is more prudent to use a faster depreciation schedule so that expenses are recognized earlier. In that way, if the asset does not live out the expected life, the company does not incur an unexpected accounting loss. Due to these factors, it is not unusual for a fully depreciated asset to still be in good working order and producing value for the firm.
If the asset is still deployed, no more depreciation expense is recorded against it. The balance sheet will still reflect the original cost of the asset and the equivalent amount of accumulated depreciation. However, all else equal, with the asset still in productive use, GAAP operating profits will increase because no more depreciation expense will be recorded. When the fully depreciated asset is eventually disposed of, the accumulated depreciation account is debited and the asset account is credited in the amount of its original cost.