For example, suppose that on January 1st an organization acquires a computer with an estimated useful life of four years. The computer costs $2,500. When the purchase is recorded, the following journal entry is made:

Fixed Assets (increase by)		$2,500
	Cash (decreases by)		$2,500

Explanation: To record the purchase of a computer for $2,500

At the end of each of the next four fiscal years, including the current year, the following journal entry will be made:

Depreciation Expense (increases by) ($2,500/4 years = $625 per year)		$625
	Accumulated Depreciation (increases by)		$625

Explanation: To record depreciation expense for the year.

It is very important to remember that the cash for the computer was spent in the first year. However, one-fourth of the expense for the computer will appear on the Statement of Activity (Income Statement) for each of the four years it is deemed to have a useful life. Therefore, in the three years after the purchase a depreciation expense of $625 will appear on the financial statements even though no cash was expended during those years.

Accumulated depreciation, as the name implies, reports on the amount of depreciation which has accumulated over time. By the end of the first year, one-fourth of the computer will be depreciated. At the end of the second year, two-fourths (i.e., one-half) will be depreciated. By the end of the fourth year the computer will be fully depreciated. In other words, the full cost of the computer will have been recorded as an expense.

The fixed asset portion of the Statement of Position (Balance Sheet) will represent this accumulated depreciation for the computer as follows:

Year 1
Computer (cost)	$2,500
Less: Accumulated Depreciation	<625>
Net Fixed Assets	$1,875
Year 2
Computer (cost)	$2,500
Less: Accumulated Depreciation	<1,250>
Net Fixed Assets	$1,250

Over the remaining two years, accumulated depreciation will increase by $625 per year and net fixed assets will decrease by $625 per year, until accumulated depreciation is $2,500 and net fixed assets is zero.

In this example, the organization determined that the useful life of the computer was four years, and that at the end of that time the computer would have no remaining value. Most nonprofits charge an equal amount of depreciation expense to each year of the assetís useful life. This is called ìstraight-line depreciation.î

To calculate depreciation charges for each fixed asset, you must know how much the asset cost (including all costs necessary to make the asset operational), how long the asset can reasonably be expected to last before it needs to be replaced, and whether the item will have any salvage value at the end of its useful life. Since there are certain conventions for items such as computers, vehicles, furniture, buildings, and other fixed assets, you should consult with your accountant when estimating the useful life of a new capital purchase.

Since depreciation expense is a non-cash expense (that is, cash is usually paid out in the year the asset is acquired, but the expense is distributed over several years), it is important to plan for the replacement of fixed assets as they wear out or become obsolete. For example, some organizations set aside an amount of cash equal to the amount of their yearly depreciation expense so that money will be available to purchase a new asset once the current one is fully depreciated. See Financial Management FAQ No. 19, How Much Cash Should We Hold In Reserve?, for some guidelines.