Depreciation allocates an asset’s cost, less its estimated salvage value, over its useful life. Each period’s expense is credited to accumulated depreciation, a contra-asset account, so the balance sheet shows cost less accumulated depreciation (net book value). Common book methods are straight-line and declining balance. Tax depreciation usually follows a different schedule (MACRS in the US), so many contractors keep separate book and tax depreciation.
Why it matters
Equipment is often a contractor’s largest asset. Depreciation charged to equipment units, and recovered from jobs through internal rates, is how you know whether owning a machine actually pays.
Worked example
An excavator costs $250,000, salvage $25,000, five-year life: straight-line depreciation is $45,000 a year, $3,750 a month: Dr Equipment Operating Costs (unit EQ-7) / Cr Accumulated Depreciation (illustrative).
Common mistakes
- Expensing equipment to G&A instead of the unit, so job rates never recover it.
- Using the tax schedule on the GAAP statements without saying so.
How os.construction handles it
In the accounting preview, the asset register has separate book and tax schedules, and depreciation runs are previewed, posted and, if needed, reversed. See Fixed assets and equipment.