Depreciation

http://www.investopedia.com/terms/d/depreciation.asp

Depreciation

Buildings, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely, therefore they will depreciate in value.

What long-term asset will not depreciate?

What is depreciation?

• A method of distributing the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

Accumulated Depreciation

• The total amount of depreciation over time until a single point.

Depreciation Purposes

• For financial purposes, depreciation indicates how much of an asset's value has been used up.

• For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.

Financial Depreciation

• Depreciation is used in finance to try to match the expense of an asset to the income that the asset helps the company earn. (Matching principle)

• For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 which will be matched with the money that the equipment helps to make each year.

Example 2

• The amount not yet depreciated (or not yet matched to revenues) does not indicate the current value.

For example, a computer might be depreciated over five years with equal amounts each year; however, the computer’s value after one year may be only half of its cost.

Book Value

• The value at which an asset is carried on a balance sheet.

• AKA: Carrying value• To calculate: Cost of an Asset minus the Accumulated Depreciation.

Book Value = Cost - Accumulated Depreciation

Straight-line Method

• This takes an estimated scrap value of the asset at the end of its life and subtracts it from its original cost. This result is then divided by management's estimate of the number of useful years of the asset. The company expenses the same amount of depreciation each year.

Formula for the straight-line method

Straight line depreciation =

*scrap value= how much money can you get to salvage an object when it is no longer of use