Depreciation schedule: building and justifying your charges

Quick answer. A depreciation schedule spreads the cost of a fixed asset over its useful life. You start from the depreciable base (gross value less residual value, article 214-4 of the French GAAP), choose a useful life, compute the annual charge, then apply pro rata temporis in the first year. Each line tracks net book value until it reaches zero.

In day-to-day bookkeeping files, the depreciation schedule is one of the most scrutinised documents at year-end, and also one of the worst maintained. A business owner buys a vehicle, fits out premises or acquires IT equipment, the software computes a charge, and nobody checks the useful life or the start date. The result is a distorted taxable profit, incomplete notes, and sometimes an avoidable tax adjustment.

This article explains how to build a depreciation plan asset by asset, how to decide on the useful life, how to handle assets put into service during the year, and how to justify everything in the working file and in the notes. The angle is deliberately operational: what a firm actually does when building or reviewing a depreciation schedule.

The depreciable base is the starting point of every calculation, and the first source of error. The depreciable amount of an asset is its gross value less its residual value: that definition is set out in article 214-4 of the French GAAP. Residual value is taken into account only if it is both significant and measurable, which is rare for most assets of a small business.

Gross value is the entry cost: purchase price excluding recoverable taxes, plus the incidental costs needed to bring the asset into working condition (transport, installation, non-recoverable customs duties). For a 12,000 euro piece of equipment with 800 euros of delivery and installation, the gross value is 12,800 euros.

The systematic allocation of that depreciable amount over the useful life, using the method specific to the asset, is governed by article 214-13 of the French GAAP; article 214-3 deals with the depreciation method, and article 214-1 sets the principle that an asset whose use is limited in time must be depreciated. In other words, three provisions work together: the principle (214-1), the method (214-3), and the measurement of the amount and its spreading (214-4 and 214-13).

Our reading. In practice, for a small or very small business, residual value is almost always left at zero, because it is neither significant nor reliably measurable. The real discussion is about the useful life, not the residual value. That is where the quality of the schedule is decided.

The accounting useful life must reflect the expected real use of the asset within the business. It is not an imposed figure but an estimate to document. Tax authorities tolerate standard useful lives commonly applied by profession, which serve as reference points.

These lives are indicative professional benchmarks, to be confirmed in context. A business that replaces its workstations every two years can justify a two-year life; furniture under heavy use can be depreciated faster. The golden rule: the useful life must be consistent with operational reality, and that consistency must be explainable.

Trade-off. For a fit-out in leased premises, the question often arises: should you depreciate over the asset's useful life or over the lease term? When the lease is shorter than the useful life and no renewal is certain, using the lease term is generally more prudent and more defensible. When renewal is virtually certain, the asset's useful life is justified. This choice is discussed file by file with the firm.

Under straight-line depreciation, the mechanics are simple. The rate equals 100 divided by the life in years. The annual charge equals the depreciable base times that rate. Net book value falls each year by the cumulative charge.

Take the 12,800 euro equipment depreciated over 5 years, a 20 percent rate and a full annual charge of 2,560 euros. Assume it is put into service on 1 April N. The first year is computed pro rata temporis: on a day-count convention, from 1 April to 31 December, that is 275 days out of 365, so the charge for N is about 1,929 euros.

The schedule runs over six accounting periods, because the first-year pro rata pushes the end of depreciation into a sixth period. Net book value reaches zero at the end, which is the fastest consistency test: if the last line does not fall to zero (or to the residual value), there is a calculation error.

Accounting depreciation starts on the date the asset is put into service, not on the purchase date. This is a common file error: equipment invoiced in November but actually used from January generates no charge for the period closed in December.

Two conventions coexist. The day-count convention measures days of use over 360 or 365 days. The month convention counts each started month, or each full month depending on the setup. The first is more precise, the second simpler. What matters is applying the same convention to all assets and keeping it consistent from one period to the next.

The underestimated risk. Tax declining-balance depreciation, provided by article 39 A of the French tax code for certain new equipment, follows a different start rule: it runs from the first day of the month of acquisition, not from the date put into service. Mixing the two logics distorts the calculation. Declining-balance depreciation and its trade-offs deserve separate treatment, as it is an optional cash-flow advantage, distinct from accounting depreciation.

Here is the sequence the firm follows to build a reliable depreciation plan.

1. Identify the gross entry value, incidental costs included, from the invoice and supporting documents.
2. Determine the residual value, most often nil, and keep it only if it is significant and measurable (article 214-4 of the French GAAP).
3. Set the expected useful life, based on standard benchmarks and operational reality.
4. Compute the straight-line rate and the full annual charge.
5. Determine the date put into service and apply pro rata temporis to the first year.
6. Roll the charges down to a nil net book value, checking the cumulative total.
7. Archive the schedule in the permanent file and report it in the notes.

Software such as the Pennylane accounting platform generates these schedules automatically, but the setup of the useful life and the date put into service remains a human choice. The tool does not replace the judgement: it executes it.

The notes to the annual accounts set out movements of fixed assets and depreciation: gross value at opening, increases, decreases, charge for the year, net value at closing, by asset category. Small entities in the accounting sense may be exempt from notes or produce only abridged notes: this point, tied to the thresholds in force, must be checked case by case.

Even when exempt from detailed notes, the business must keep the per-asset depreciation plans in its file. In a tax audit, it is this schedule, and the consistency between the date put into service, the useful life chosen and the charge recorded, that the authorities look at first.

Common case. A bookkeeping file shows a fleet of IT equipment depreciated over 5 years while the business renews its workstations every 3 years. The charge is too low, the net book value overstated, and disposal of the assets will generate poorly anticipated losses. The fix is to realign the useful life with real use, which brings the schedule closer to reality and makes management's financial dashboard more reliable.

Some fixed assets fall outside the standard pattern. The components of a complex asset (a roof, a lift in a building) can be depreciated separately over different lives: the component approach. Goodwill, in principle not depreciable, can be depreciated in specific cases, a topic detailed in our analysis of goodwill depreciation. Finally, depreciation of a furnished rental property follows its own rules, set out in our resource on calculating depreciation under the French furnished-rental regime.

• The depreciable base is gross value less residual value, defined in article 214-4 of the French GAAP; residual value is kept only if significant and measurable.
• Allocation over the useful life is governed by article 214-13 of the French GAAP: the life must reflect expected real use, not just the tax-driven standard period.
• Depreciation starts when the asset is put into service, with first-year pro rata temporis, never on the purchase date.
• The last line of the schedule must bring net book value to zero or to the residual value: that is the consistency test.
• Tax declining-balance depreciation (article 39 A of the French tax code) follows a distinct start rule and remains optional.
• The depreciation plan must be archived and, where relevant, reported in the notes: it is the first document the authorities review.