How Does Depreciation & Retirement of Assets Work?

Depreciation helps a company reduce fiscal liabilities.

A company's assets are economic resources that it owns and uses in operating activities. Asset depreciation and retirement procedures help top leadership provide an accurate and complete accounting of operating resources.

Asset Depreciation

Depreciation means spreading the cost of a fixed asset over several years. A fixed asset, also known as a long-term asset, is an economic resource that a company intends to use in operating activities for more than a year. Depreciating an asset implies that a firm reduces the book value of the asset.

Asset Retirement

Asset retirement is a business process that allows senior management to review corporate long-term assets, measure asset operating efficiency and select the most productive assets to use in operating activities. Simply put, retiring an asset means removing it from the long-term asset category. However, an asset retirement is not an asset sale.

Relationship

Asset retirement and asset depreciation are distinct concepts, but they usually interrelate. A company may depreciate an asset and decide to retire it because of the asset's low value or economic conditions not favorable for a sale.

References

• The CPA Journal: Accounting for Asset Retirement Obligations
• Investopedia: Depreciation