What it means
When a business buys a machine, vehicle or building, it records the cost as an asset instead of an immediate expense. The cost is then charged to the accounts gradually through depreciation.
The placed in service date tells the accountant when that charging should start. An asset is placed in service when it is installed, tested and ready to do the job it was bought for, even if it has not yet been used.
A delivery to the loading dock does not count, and neither does a machine that is still waiting for a safety inspection. This rule keeps the expense matched to the period in which the asset starts to help earn income.
The date matters for tax as well as accounting. Many tax systems start depreciation or capital allowance claims only from the date an asset is placed in service, and the tax year in which that happens affects the size of the first deduction.
Because rules differ by country, finance teams should confirm local requirements. Before the placed in service date, costs are usually collected in a holding account such as construction in progress or assets under construction.
Once the asset is ready, the total is moved to the proper asset category and depreciation starts. Costs of getting the asset ready, such as installation and testing, are generally part of the asset cost.
Documentation is important. A finance team should keep proof of the date, such as an inspection certificate, a commissioning report or an email confirming that the equipment passed its tests.
These records support the accounts if an auditor or tax authority asks questions. A common issue arises with large projects, which can be placed in service in stages.
A new factory might have one production line ready in March and another in September. Each part is depreciated from its own date, if it can be used separately.
In practice
Real-world examples.
Example
A bakery orders an industrial oven in June that arrives in July, but it needs a gas connection that takes until September. The oven is placed in service in September when it first bakes a trial batch. Depreciation begins in that month, not in June or July.
Example
A logistics company builds a warehouse for $4,000,000 over eighteen months. It collects all costs in construction in progress until the building passes its final inspection in March. In that month, it moves the cost to buildings and starts depreciating.
Example
A software company buys a server for $50,000 in December but does not install it until January. The server is placed in service in January, so no depreciation is charged in the earlier year. The tax deduction is taken in the following year.
Formula
Calculation
Monthly depreciation (straight-line) = (cost - residual value) / useful life in months
First-year depreciation = monthly depreciation x months in service during the year
A company buys a machine for $120,000 with no residual value and a 10-year (120-month) useful life. Monthly depreciation is $120,000 / 120 = $1,000. The machine is delivered in August but is installed, tested and ready for production on 1 October.
For a year ending 31 December, the machine is in service for 3 months, so first-year depreciation is 3 x $1,000 = $3,000. If the company had wrongly started depreciation in August, it would have recorded 5 x $1,000 = $5,000, overstating the expense by $2,000.Case study
Seen in the real world.
Northgate Printing is a fictional printing company, and this case is illustrative. It bought a new press for $240,000 in the autumn, and the supplier delivered it on 15 September.
The finance manager asked when the press was actually ready. It needed wiring, calibration and a trial run, which were completed on 1 November, and she recorded that as the placed in service date. With a 10-year life and no residual value, annual depreciation was $24,000, so monthly depreciation was $2,000.
For the year ending 31 December, depreciation was 2 months x $2,000 = $4,000, instead of the 3.5 months x $2,000 = $7,000 that would have been recorded from the delivery date. The illustrative lesson is that using the correct date keeps profit accurate and supports the tax claim.
Watch out
Common mistakes.
- Starting depreciation on the purchase or delivery date when the asset is not yet ready for use.
- Failing to keep evidence of the date an asset became ready.
- Leaving a finished asset in construction in progress, which delays depreciation and distorts profit.
Questions
People also ask.
Does an asset have to be used to be placed in service?
No, it only has to be ready and available for its intended use.
Is the placed in service date the same for tax and accounts?
Often it is, but local tax rules may differ, so it should be confirmed.
What if an asset is placed in service in stages?
Each part that can be used separately is usually depreciated from its own date.
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