IT Asset Depreciation: A No-Frills Guide (With Methods and Calculations)

IT assets like laptops, monitors, mobile devices, and accessories all have a finite useful life and lose value each year. 

A big part of getting the most from your IT investments and optimizing the overall IT hardware lifecycle is understanding IT asset depreciation and using the right calculation method.

Here’s everything you need to know.

What is IT Asset Depreciation?

Most types of business equipment lose value over time. Some examples include machinery, vehicles, appliances, and even office furniture. 

However, IT assets tend to depreciate much more quickly, mainly because these tangible assets rapidly become obsolete and, therefore, need to be replaced more often. 

This is different from intangible assets like software that may lose value through amortization but don’t directly depreciate. 

For perspective, the average laptop or desktop has around three to five years of useful life. Industrial machinery, on the other hand, lasts 15 years on average. 

IT asset depreciation is defined by Asset Panda as “the process in which IT assets lose their value over time.”

Say, for example, you purchase a brand new laptop for $1,200. After the first year, it would likely drop 25% in value, which would leave it at $900. Then, it would continue to drop in value year after year.

The purpose of asset depreciation is to monitor the value of IT assets over the course of their useful life, which is important for ensuring accuracy when reporting for tax purposes throughout the asset lifecycle, optimizing IT spending, and improving asset replacement decisions. 

Not to mention, it provides deeper visibility into IT asset management trends and patterns and impacts your overall balance sheet. 

Common Depreciation Methods for IT Assets

1. Straight Line Depreciation

If you’re looking for a simple, predictable fixed asset depreciation method, this is usually the best choice. 

With the straight line technique, you simply choose a percentage of how much asset value is lost every year and repeat it year after year. 

To use our earlier example, the original book value of a laptop was $1,200, and there was an annual depreciation of 25%. With this fixed asset method, you would subtract 25% from the original cost each year, which would be $300 ($1,200 x 25%).

So after the first year, this would translate into the laptop being worth $900 ($1,200 - $300). After year two, it would be worth $600. After year three, it would be $300 of salvage value, and so on. 

This method works well for many businesses because you simply spread out the asset depreciation evenly throughout its useful life. There’s no guesswork and no complicated math involved. 

And while it’s not necessarily as accurate as some other product depreciation methods, it should be sufficient in most cases for gauging depreciation value. 

2. Double Declining Balance Depreciation

With this technique, you follow the exact same process as the straight line method, but you double the annual depreciation rate when recording financial statements. 

The logic here is that by having assets depreciate twice as quickly through accelerated depreciation, you can write off double the asset’s value during the early days, which can be helpful for many smaller businesses looking for tax relief. 

So if you used a 25% depreciation rate for a $1,200 laptop, you would double it to 50% with a double declining balance. So, at the end of the first year, it would have a value of $600, at the end of the second year, it would have $300 of salvage value, and so on. 

3. Declining Balance Depreciation

The name of this method can be a little misleading at first glance, as it can easily be confused with double declining balance depreciation, as we just discussed. 

The key difference is that rather than deducting from the original cost of an IT asset, you deduct from the remaining book value. 

Like double declining balance depreciation, the value of a tangible asset, like a desktop, laptop, or mobile device, drops more quickly during the first few years for more aggressive tax write-offs on your financial statement. 

Let’s go back to our example of a $1,200 laptop that has an annual depreciation of 25%. 

With the declining balance method, you would subtract $300 just like you would with the straight line technique for a total of $900 after year one. But each subsequent year would look like this. 

• $900 x 25% ($225) for a total remaining value of $675 after year two ($900 - $225)
• $675 x 25% ($168.75) for a total remaining value of $506.25 after year three ($675 - $168.75)
• $506.25 x 25% ($126.56) for a total remaining value of $379.69 after year four ($506.25 - $126.56)
• And so on

This depreciation calculation requires a bit more effort than other fixed asset depreciation expense techniques, but it tends to be a bit more accurate.

4. Sum-of-Years-Digits Depreciation

This is like double declining balance and declining balance depreciation in that it assigns higher annual depreciation during the earlier years. However, it differs significantly in the formula, which looks like this, according to Asset Panda.

Depreciation expense = Net asset cost x (Remaining life of assets (years) / sum of all digits of total life of asset).

Say, for instance, you have a $1,200 laptop that will have a useful life of five years. With sum-of-years-digital depreciation, you would add up 5+4+3+2+1 for a sum of 15 (one for each year of the years within the useful life). 

Then, each year’s depreciation would be the numerator and the useful years of life would be the denominator in a series of fractions. 

Here’s an example. 

• $1,200 x (5/15) for year one = $400 for a total of $800 salvage value
• $1,200 x (4/15) for year two = $320 for a total of $480 salvage value
• $1,200 x (3/15) for year three = $240 for a total of $240 salvage value
• $1,200 x (2/15) for year four = $160 for a total of $80 salvage value
• $1,200 x (1/15) for year five = $80 for a total of $0 salvage value

How to Calculate IT Asset Depreciation

First, you’ll need to choose the specific depreciation expense method that best fits your business. 

For instance, if you want the most straightforward method, straight line is likely your best bet. Or if you want higher tax write-offs during the earlier years of an asset’s lifecycle, then one of the other three options would probably be a better fit. 

Once you’ve chosen a depreciation method, you’ll need to identify an asset’s original book value, the length of its useful life, and the estimated salvage value, which is how much an asset is worth at the end of its useful life. 

From there, you’ll need to apply the formula of the depreciation method you’ve chosen, as outlined above. 

IT Asset Depreciation Schedules and Useful Life

Depreciation schedules are used to create an outline of how an asset’s value declines over time. This usually starts with the original book value and factors in annual depreciation as an item loses value each year. 

And in the grander scheme, it takes into account accumulated depreciation as the overall value continues to drop. 

As we mentioned earlier, most IT assets, like desktops and laptops, have a useful life of three to five years. However, mobile devices can be even lower, while other equipment, like peripherals, may last up to 10 years. 

The key to efficient financial reporting while upholding accounting standards and staying compliant with the Income Tax Act is to be realistic about the length of each asset’s useful life and salvage value, and set your schedules accordingly. 

Also, note that useful life doesn’t necessarily mean how long you can actually use an asset before it dies. You should also consider how long it’s truly relevant to business operations while meeting basic performance and security requirements.

Best Practices for Managing IT Asset Depreciation

For starters, it’s vital that you keep a close eye on all of the assets within your inventory at all times.

Ideally, you’ll use an IT asset lifecycle management tool or an enterprise management platform to streamline the process, as this offers 100% visibility in real-time. 

That way, you can be confident about what’s in your inventory, who has what, what’s in storage, what’s in transit, and so on. 

This brings us to the second of our IT asset management best practices — automation. 

Whenever you’re dealing with a large number of IT assets, processes can get meticulous and messy in a hurry. That’s why it’s smart to use asset management tools, workflow automation platforms, and accounting tools to help you get more done with less effort. 

Finally, be sure that everyone within your company who’s involved with asset management is on the same page in terms of:

• How you classify assets
• What the useful life of each asset is
• What depreciation method you use
• The average salvage value

We suggest creating a single resource to serve as a point of reference, both for new employees and existing employees, to eliminate confusion.

What’s the Next Step?

Although asset management can seem a little overwhelming, it’s really just a matter of getting a grasp of your inventory and choosing the optimal depreciation method. 

If your computers are ready to recycle or dispose of, IT asset disposition services may be the next step.

Again, using a full service asset management software and service like allwhere can help automate much of the asset tracking process of each tangible and intangible asset and simplify operations. Learn more about allwhere’s IT asset disposal services, as we can assist with that as well.