How Your Startup Should Record Fixed Assets: Capitalize, Depreciate, and Track

The First Big Decision: Should You Expense or Capitalize?

Your team is growing, and so is the list of purchases. That new developer needs a high-spec laptop, the office needs better furniture, and maybe you have invested in a dedicated server rack. Each purchase feels like a simple expense, another line item in your bookkeeping software. But as these costs accumulate, they raise a critical question in startup accounting: are these just expenses, or are they something more significant?

Getting this right is not about complex financial theory. It is about accurately representing your company's value, managing your tax obligations correctly, and presenting a clean, credible set of books to investors. Misclassifying these items can distort your financial health, making it harder to track runway and make sound decisions. This guide provides a practical framework for how to record fixed assets, helping you build a solid financial foundation from pre-seed to Series B.

You just bought a new MacBook Pro for $3,000. Is it a simple expense that hits your Profit and Loss (P&L) statement immediately, reducing this month's profit? Or is it a long-term resource, an asset that should appear on your Balance Sheet? This is the first big decision in startup asset management, and the answer depends on your capitalization policy.

Defining Your Capitalization Policy

A capitalization policy is a formal rule your company sets to define a cost threshold. Any purchase below this threshold is treated as an immediate expense. Any purchase above it is “capitalized,” meaning it is recorded as an asset. This policy is the foundation of fixed asset accounting basics and ensures consistency in how you treat purchases.

What founders find actually works is establishing a clear threshold early on. For pre-seed to Series A startups, a suggested capitalization threshold is typically between $1,000 to $2,500 per item. This range provides a pragmatic balance. For US companies, this aligns well with tax guidelines. The IRS De Minimis Safe Harbor allows businesses without an audited financial statement to expense items costing up to $2,500 per item.

Let’s use a practical example:

• Scenario 1: Expensing. You buy a new office chair for $400. Since this is below your $2,500 capitalization threshold, you record it as an “Office Supplies” or “General and Administrative” expense. The full $400 immediately reduces your profit for the month.
• Scenario 2: Capitalizing. You buy that new MacBook Pro for $3,000. This is above the threshold. Instead of expensing it, you record it on your Balance Sheet as a “Fixed Asset.” The cash leaves your bank, but your monthly profit is not immediately impacted by the full cost. The asset now holds value on your company's books.

Getting this distinction right is fundamental for anyone learning how to track business assets accurately. It directly impacts key metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is often used by investors to assess your company’s operational performance.

An Introduction to Depreciation Schedules for Startups

Okay, so the $3,000 computer is now a fixed asset on your Balance Sheet. But you know that in three or four years, that laptop will not be worth $3,000. This is where depreciation comes in. Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It is how you systematically turn the asset's cost into an expense over time, reflecting its usage and loss of value.

To calculate depreciation, you need three key pieces of information:

1. Cost Basis: This is the total amount you paid for the asset, including purchase price, taxes, shipping, and any installation fees.
2. Useful Life: This is the estimated period you expect the asset to be productive for your business. For consistency, startups should use standardized estimates. Common useful lives include:
   • Laptops and computers: 3 years
   • Servers and network equipment: 5 years
   • Vehicles: 5 years
   • Office furniture: 7 years
3. Salvage Value: This is the estimated resale value of an asset at the end of its useful life. The reality for most startups is more pragmatic: for items like electronics and furniture, the salvage value is often negligible. Therefore, a common salvage value assumption for startups is $0.

By capitalizing the purchase and then depreciating it, you match the expense of the asset to the periods in which it helps generate revenue. This is known as the matching principle and it gives you, and your investors, a more accurate picture of your company's profitability each month.

Choosing the Right Depreciation Method

Now that you have the cost, useful life, and salvage value, how do you actually calculate the depreciation expense? For internal bookkeeping, simplicity is key. For financial reporting under both US GAAP and UK FRS 102, the simplest and most common method is straight-line depreciation. It spreads the cost evenly across each period of the asset's useful life.

The formula is straightforward:

Depreciation Expense per Year = (Cost Basis - Salvage Value) / Useful Life

Let's continue with our $3,000 MacBook Pro example. It has a useful life of 3 years and a salvage value of $0.

Calculation: ($3,000 - $0) / 3 years = $1,000 per year.

This means you will record $1,000 in depreciation expense each year for three years. Your monthly bookkeeping entry would be for $1,000 / 12 = $83.33. For practical posting advice, see the guide on journal entry best practices for startup bookkeepers.

Book vs. Tax Depreciation: Why They Are Different

It is critical to distinguish between depreciation for your internal books and depreciation for your tax return. They serve different purposes and often use different methods.

Book Depreciation is used for internal reporting to investors, management, and lenders. Its purpose is to provide an accurate representation of the company's financial health. The most common method is Straight-Line because it is simple, consistent, and reflects the true economic usage of the asset over time. You or your bookkeeper will manage this within your accounting software like QuickBooks or Xero.

Tax Depreciation is used solely for calculating your taxable income on tax returns. Governments often allow accelerated methods to incentivize business investment. For US companies, this is the Modified Accelerated Cost Recovery System (MACRS). For UK companies, this is part of the Capital Allowances scheme. These methods are complex and are managed by your external tax accountant.

For your day-to-day startup asset management, focus on getting the straight-line method right in your books. Let your external tax advisor manage the complexities of tax-specific calculations when filing your annual returns.

The Asset Register Setup: Your Single Source of Truth

As you begin recording equipment purchases and other assets, tracking them becomes essential. You cannot rely on memory or sifting through old invoices. The solution is a fixed asset register, which is a detailed list of all the fixed assets your company owns. This register is your single source of truth for asset tracking and is crucial for audits, due diligence, and insurance purposes.

At first, a simple spreadsheet in Google Sheets or Excel works perfectly well. Your register should include the following columns for each asset:

• Asset ID (a unique number you assign)
• Asset Description (e.g., "16-inch MacBook Pro, M2 Chip")
• Serial Number
• Purchase Date
• Purchase Cost (the full cost basis)
• Useful Life (in years)
• Depreciation Method (e.g., "Straight-Line")
• Salvage Value
• Monthly Depreciation Amount
• Accumulated Depreciation to date
• Net Book Value (Cost - Accumulated Depreciation)
• Asset Location or Assigned Employee

This spreadsheet is the foundation of your asset register setup. However, as your company grows, manually updating depreciation schedules for dozens of assets becomes tedious and prone to error. A scenario we repeatedly see is that once a startup has approximately 20-30 fixed assets, the time spent managing a spreadsheet outweighs its simplicity. At this point, it makes sense to upgrade. Modern accounting systems like QuickBooks Online Advanced and Xero have built-in fixed asset modules that automate these calculations, link directly to your general ledger, and ensure your depreciation schedules for startups are always up to date.

Handling Complex Assets: Software and Improvements

While laptops and furniture are straightforward, startups often deal with more complex assets. Understanding the basic rules for these can prevent major accounting headaches later.

Software Capitalization Rules

For tech companies, a significant investment is software. The accounting treatment depends on how it was acquired and its intended use.

• Off-the-shelf software: A subscription like Adobe Creative Cloud is typically an operating expense. A perpetual license for software costing more than your capitalization threshold would be treated as a fixed asset and depreciated, usually over 3 years.
• Internal-use software: If you are developing software for your own operations (not for sale), the rules are more nuanced. Under US GAAP, costs incurred during the preliminary planning stage are expensed. Costs from the application development stage, like coding and testing, are capitalized. Costs for training and maintenance are expensed as they occur. These software capitalization rules require careful tracking of developer time and related costs.

Leasehold Improvements

If you have a physical office, you might invest in improvements like building out new meeting rooms or installing custom wiring. These are known as leasehold improvements. They are capitalized and recorded as fixed assets. However, their useful life for depreciation is the shorter of the asset's actual useful life or the remaining term of the office lease.

Practical Takeaways for Startup Founders

Implementing a system for how to record fixed assets in startup accounting does not have to be complicated. It is about establishing simple, scalable processes today to prevent major headaches tomorrow.

First, define and document your capitalization policy. A threshold between $1,000 and $2,500 is a sound starting point that aligns with standard practice and, for US companies, the IRS safe harbor. Communicate this policy to anyone involved in purchasing to ensure consistency.

Second, for your internal financial statements, stick with the straight-line depreciation method. It is simple to calculate, easy to understand, and provides a clear and consistent view of your asset values over time. This is the standard for investor and management reporting.

Finally, maintain a fixed asset register from day one. Start with a spreadsheet, but know the trigger point, around 20-30 assets, for transitioning to the fixed asset module in your accounting software like QuickBooks or Xero. Use a month-end checklist to ensure your register is always reconciled and audit-ready.

This simple discipline ensures your financial records are accurate, auditable, and ready for the scrutiny of investors or potential acquirers down the road.

Frequently Asked Questions

Q: Can we capitalize the costs of developing our own software?
A: Yes, under certain conditions. Costs from the application development phase of internal-use software can often be capitalized according to both US GAAP and FRS 102. This includes coding, testing, and configuration. However, costs from preliminary research and post-implementation maintenance must be expensed as incurred.

Q: What happens if we sell or throw away a fixed asset?
A: When you dispose of an asset, you must remove both its original cost and all accumulated depreciation from your books. If you sell it for more than its Net Book Value (cost minus accumulated depreciation), you record a gain. If you sell it for less, or scrap it for $0, you record a loss.

Q: Should we bundle small purchases to meet the capitalization threshold?
A: Generally, no. A capitalization policy applies on a per-item basis. Purchasing twenty $150 office chairs should be recorded as a $3,000 expense, not as a single $3,000 fixed asset. The IRS De Minimis Safe Harbor explicitly states the limit applies per item or per invoice.