Depreciation and Net Assets

[Zorak]

This post was caught in our spam filter for some unknown reason. We apologize for the false positive and have reported it to the third party provider. Reposting it here for user "ejsteffes":

I understand that depreciation is debited to a Depreciation expense account and credited to an Accumulated Depreciation asset account. My question is how to handle it in the Net Assets section. I've been told that the Depreciation expense account closes to Unrestricted Net Assets the same as any other expense, but that seems to have the potential for illogical results. Our Unrestricted Net Assets account is quite small; most of our net assets are in building equity or donor restricted funds. The cumulative effect of closing annual depreciation to Unrestricted Net Assets could be to reduce that account to zero or below, even when we continue to have unrestricted cash on hand! Shouldn't depreciation show up as a reduction to the type of net asset being depreciated--building, furnishings, equipment, etc.? These are also in the unrestricted group within net assets but not in the same detail account as Unrestricted Net Assets.

I will leave the question open for more experienced accounting folks to answer.

[JohnDMeyers]

The amount that you depreciate is a percentage of your depreciateable assets.

If you buy a projector, for example, for $1000, and depreciate it over 5 years, you take-away $200 per year.

After 5 years, you have to remember to stop taking out $200 per year for that asset.

The cash in your restricted fund doesn't need to be depreciated. (let me think.... our cash in this country is losing value ..... no no, just kidding). It is kind of strange to think about having to depreciate cash someday, though.

You may need to consult a CPA to see if any of your land and buildings need to be on the depreciation schedule. Typically, they do not.

The only things that need to be depreciated are things that, well, depreciate in value over time.

Remember that the purpose of the depreciation amount is to give an accurate account of what your organization is really worth. (hence, net assets, with emphasis on NET)