What Is Unabsorbed Depreciation?

Depreciation lowers the value of equipment and machinery.

A company depreciates long-term assets to recover expenses it incurs in operating activities and maintenance processes. Fiscal laws allow a firm to recover unabsorbed depreciation over a number of years.

Depreciation Definition

Depreciation methods help a company spread the cost of fixed assets over several years. Fixed assets are also known as long-term or capital assets. Examples include property, plants, equipment and machinery. Depreciation expense is a noncash item, meaning a company does not pay for it.

Deduction Limits

To record an asset's depreciation, an accountant debits the depreciation expense account and credits the accumulated depreciation account. Unabsorbed depreciation is accumulated depreciation that a company is unable to deduct in tax reports because of fiscal limits that the Internal Revenue Service sets every year.

Future Years

The IRS allows businesses and individuals to carry forward unabsorbed depreciation. In other words, a company can deduct unabsorbed depreciation in future years' financial statements until the depreciation account has a zero balance. An accountant reports depreciation expense in the statement of profit and loss.

References

• Indlaw: Carry Forward of Business Losses
• Money Control: How to Set-Off Unabsorbed Depreciation?