Fixed assets are defined as business items that have useful lives of over one year. An ac-
counting period can be a month, quarter, six months, or a full year.
Continuing with the amp example, let’s say your need to sonically shatter the walls
aligned with a client paying you for the biggest venue you’ve ever played, and you decide
to invest in a top-end amp set-up that going to set you back $8,000 when all is said and
done. From an accounting point-of-view, let’s say the useful life for this monster is five
years. Using a one-year accounting period and the straight-line method of depreciation,
the amount of depreciation is one-fifth or $1,600. Eight thousand divided by five. That’s
easy enough to understand.
Moving on, things begin to get a bit more complex. There are two types of useful life
durations for business assets. The first is used for book depreciation, which is used in ac-
crual accounting. The second is used for tax depreciation. Since most artists will be using
cash accounting, I’ll address the latter. The IRS publishes a hefty, 120-page document ti-
tled How To Depreciate Property. It’s also called Publication 946 and is available for
download at http://www.irs.gov. In it, they provide a table listing various business fixed assets
and the useful life for each.
Next is the method of depreciation. There are two primary ones. The first is straight
line, which is the method used in the example above. Straight line is straightforward. Di-
vide the cost of an item by its useful life. The second is accelerated depreciation, the most
popular is called double-declining balance. This method is based in the idea that an asset
will get more use in its early years, thus justifying a higher depreciation amount in the
earlier years.