Depreciation of a building in accounting works on the same principle as the depreciation of machinery or equipment. It can be done once a year during the financial statements, or, if desired, depreciation can be recorded monthly. In simple terms, depreciation is calculated by determining the depreciation amount from the building’s residual value and making the necessary accounting entry.

Depreciable vs. non-depreciable fixed assets

Fixed assets are assets acquired for company use that are not intended for resale, but rather for the company’s own operations. For tax purposes, fixed assets are divided into depreciable and non-depreciable categories.

As the name implies, non-depreciable fixed assets do not lose value through use. Therefore, depreciation is generally not applied to non-depreciable assets. Instead, their acquisition cost (the value at which the asset was purchased) is deducted only when the asset is sold or otherwise disposed of. Examples of non-depreciable assets include land, shares, securities, and artworks.

Depreciable fixed assets, on the other hand, are assets that are in use by the company. For depreciable tangible assets such as machinery and equipment, a maximum depreciation rate of 25% can be applied (or increased depreciation for 2020–2025), while building depreciation follows its own rules.

Buildings in accounting

Depreciation of buildings differs from that of other assets like machinery or equipment because building depreciation must be calculated individually for each building, whereas machinery and equipment can be depreciated as a whole from the total residual value.

If a company owns multiple buildings, it is practical to record them in the balance sheet so that they can be easily reviewed individually. This can be done by creating a separate account for each building or grouping buildings with the same depreciation rate under a single account, e.g., “Buildings 4%.” If multiple buildings are recorded under one account, each building’s depreciation must still be tracked separately, for example, using an Excel spreadsheet.

Depreciation rates for buildings

Buildings and structures do not have a uniform depreciation rate; the rate varies depending on the building’s purpose. Maximum annual depreciation rates are as follows:

• 7% of the undepreciated acquisition cost for:
  • Retail buildings
  • Warehouse buildings
  • Factory buildings
  • Workshop buildings
  • Utility buildings
  • Power plant buildings
  • Or other comparable buildings

• 4% of the undepreciated acquisition cost for:
  • Residental buildings
  • Office buildings
  • Or other comparable buildings

• 20% of the undepreciated acquisition cost for:
  • Fuel tanks, acid tanks or similar metal or comparable storage structures
  • Lightweight wooden or similar constructions
  • Buildings or structures used exclusively for business-related research activities

It is important to note that the depreciation rate is determined by the building’s primary use. For example, if a company owns an industrial hall primarily used for industrial operations, a small office space in the corner does not affect the depreciation rate; the hall is depreciated at 7% in total. However, if the hall is used equally for industrial and office purposes, depreciation can be split according to use: 7% for the industrial portion and 4% for the office portion.

Recording building depreciation in accounting

Depreciation of buildings is recorded in the same way as other asset depreciation. In short, the building’s value is transferred from the balance sheet to the income statement to reduce the company’s taxable income.

Retail Building
– Remaining undepreciated balance: €250,000
– Depreciation rate: 7%
– Depreciation amount (€250,000 × 7%): €17,500

Office Building
– Remaining undepreciated balance: €120 000
– Depreciation rate: 4%
– Depreciation amount (€120,000 × 4%): €4,800

Journal Entries:
– DEBIT: (6900) Income statement account “Depreciation”
– CREDIT: (1111 / 1112) Balance sheet accounts for buildings

Like machinery and equipment, the value of buildings decreases over time due to usage and wear. Therefore, building depreciation is recorded in accounting to ensure that the wear-and-tear process is reflected in the company’s financial reports.