Managing Depreciation of Your Rental Equipment

Arielle Cox

Depreciating your rental equipment over time lets you spread the cost out over its entire lifespan. Used strategically, this lets you avoid having to take a hit for the full value all at once. As assets are rented out and accumulate wear and tear – therefore reducing their value – you can consistently revalue them to keep your books as accurate as possible.

Tracking Depreciation in Your Rental Software

Different accounting systems may have you set up depreciation in different ways. In InTempo, the first step in managing rental equipment depreciation is assigning a depreciation lifespan and method at the category, class, or equipment level. If you choose either of the first two methods, anything you purchase that falls under that cat/class will have the corresponding depreciation method and lifespan applied to it. However, these generalizations can be overridden at the individual equipment level if you like (i.e., if certain bulldozers in your fleet should depreciate on a different schedule than other bulldozers. 

The most common depreciation schedules are:

• Straight-line depreciation is when the cost of an asset is evenly spread out over its useful life (this is the simplest and most commonly used method for calculating depreciation).
• Declining-balance depreciation records larger depreciation expenses in the early years of an asset’s life (a constant depreciation rate is then applied to the asset’s declining book value each consecutive year).
• Units of production depreciation spreads the cost of an asset out based on how much it is used, rather than how long it has been in use.
• Sum-of-years-digits depreciation’s calculation uses higher depreciation charges in the early years of the asset’s life, then gradually decreasing depreciation over time. (the way to calculate this is to add up the digits of an asset's useful life, then divide the remaining useful life by that sum to determine the depreciation for each year).

For example, if you select the straight-line method, add a piece of equipment worth $10,000, and set your depreciation to 20 months, the book value is calculated by dividing the initial value by the number of months, giving you a monthly depreciation amount of $500.

In InTempo, you’ll then fill out three fields to calculate your depreciation.

1. Add to the “Date in Rental” field – Depreciation does not calculate on new equipment because it has not yet accumulated wear and tear.
2. Choose Your Depreciation Method – Straight Line, Off-Books, etc.
3. Find Depreciation Life – The number of months you estimate the equipment to retain its value.

Depreciation is calculated against book value. The system calculates book value as equipment cost minus salvage value minus accumulated depreciation. The book value is then divided by the remaining months (life) to get the monthly depreciation amount. This is the amount of the hit that you take monthly to your GL.

What is Salvage Value in Depreciation?

Salvage value means that once the equipment ages beyond its set depreciation lifespan, it doesn’t technically have a true value of $0; you can still sell it for scraps/parts. Adding in a salvage value lets you receive that amount back at the end of the equipment's lifespan and further offsets part of the cost.

Delayed Depreciation

If you have a piece of equipment, you may not want to (or accidentally forget to) start depreciating it immediately. For instance, if it has been sitting in your yard for five months and you realize you haven’t been depreciating it, once you add it into InTempo, the system will update the depreciation period for you. (In this example, if the machine was initially intended to have a depreciation life of 36 months but 5 months pass before it starts to depreciate, the system won’t divide it by 36 months, but rather by 31.)

Similarly, InTempo can help you more easily manage the rest of your equipment depreciation process as things change. If you—for instance—add a salvage value, change the life from 36 to 40 months, or change the original cost, the depreciation value will also recalculate and change.

Should you Depreciate Every Piece of Equipment in Your System?

Not all equipment types depreciate. “Consigned”, “customer-owned,” and “floored” equipment, for example, do not accumulate wear and tear in a way that would impact your financials, so you would not need to calculate depreciation in your software the way you would for traditional rental assets.

Discover an Integrated Way to Manage Equipment Depreciation Along with Your Other Financial Processes

InTempo Enterprise brings all of your accounting functions onto one integrated platform. You track depreciation in the same place you track your Accounts Payable, Accounts Receivable, and General Ledger; there is no need for a separate third-party system.

If you’d like more information about managing depreciation or have questions about improving your approach to rental accounting, contact us today.