What Is Funded Depreciation?

Funded depreciation helps a company renew operating equipment

Accounting rules allow a company or business owner to depreciate a tangible asset over several years to recover the asset cost. Funded depreciation helps a business owner renew operating equipment in the short and long terms.

Depreciation Defined

Depreciating an asset means recovering its cost over a specified number of years. For example, if you own a truck and use it for business purposes, you may depreciate the truck over many years. In so doing, you recover the initial truck value over the depreciation term.

Funded Depreciation

Funded depreciation is a business practice that allows you to set aside every year an amount equal to the depreciation expense. You will use this cash reserve to purchase a new fixed asset, such as a new truck, when the current one is no longer functional.

Significance

Funded depreciation is a key management method because it helps you renew operating machinery and ensure process efficiency. Having the financial means to buy new equipment can be economically advantageous, especially if your company experiences strong growth in sales and you want to expand operating activities.

References

• South Dakota Department of Human Services: Cost Report
• Venture Line: Funded Depreciation Account Definition