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WIKIBOOKS
DISPONIBILI
?????????

ART
- Great Painters
BUSINESS&LAW
- Accounting
- Fundamentals of Law
- Marketing
- Shorthand
CARS
- Concept Cars
GAMES&SPORT
- Videogames
- The World of Sports

COMPUTER TECHNOLOGY
- Blogs
- Free Software
- Google
- My Computer

- PHP Language and Applications
- Wikipedia
- Windows Vista

EDUCATION
- Education
LITERATURE
- Masterpieces of English Literature
LINGUISTICS
- American English

- English Dictionaries
- The English Language

MEDICINE
- Medical Emergencies
- The Theory of Memory
MUSIC&DANCE
- The Beatles
- Dances
- Microphones
- Musical Notation
- Music Instruments
SCIENCE
- Batteries
- Nanotechnology
LIFESTYLE
- Cosmetics
- Diets
- Vegetarianism and Veganism
TRADITIONS
- Christmas Traditions
NATURE
- Animals

- Fruits And Vegetables


ARTICLES IN THE BOOK

  1. Account
  2. Accountancy
  3. Accountant
  4. Accounting cycle
  5. Accounting equation
  6. Accounting methods
  7. Accounting reform
  8. Accounting software
  9. Accounts payable
  10. Accounts receivable
  11. Accrual
  12. Adjusted basis
  13. Adjusting entries
  14. Advertising
  15. Amortization
  16. Amortization schedule
  17. Annual report
  18. Appreciation
  19. Asset
  20. Assets turnover
  21. Audit
  22. Auditor's report
  23. Bad debt
  24. Balance
  25. Balance Sheet
  26. Banking
  27. Bank reconciliation
  28. Bankruptcy
  29. Big 4 accountancy firm
  30. Bond
  31. Bookkeeping
  32. Book value
  33. British qualified accountants
  34. Business
  35. Business process overhead
  36. Capital asset
  37. Capital goods
  38. Capital structure
  39. Cash
  40. Cash flow
  41. Cash flow statement
  42. Certified Management Accountant
  43. Certified Public Accountant
  44. Chartered Accountant
  45. Chartered Cost Accountant
  46. Chart of accounts
  47. Common stock
  48. Comprehensive income
  49. Consolidation
  50. Construction in Progress
  51. Corporation
  52. Cost
  53. Cost accounting
  54. Cost of goods sold
  55. Creative accounting
  56. Credit
  57. Creditor
  58. Creditworthiness
  59. Current assets
  60. Current liabilities
  61. Debentures
  62. Debits and Credits
  63. Debt
  64. Debtor
  65. Default
  66. Deferral
  67. Deferred tax
  68. Deficit
  69. Deloitte Touche Tohmatsu
  70. Depreciation
  71. Direct tax
  72. Dividend
  73. Double-entry bookkeeping system
  74. Earnings before interest and taxes
  75. Earnings Before Interest, Taxes and Depreciation
  76. Earnings before Interest, Taxes, Depreciation and Amortization
  77. Engagement Letter
  78. Equity
  79. Ernst a& Young
  80. Expense
  81. Fair market value
  82. FIFO and LIFO accounting
  83. Finance
  84. Financial accounting
  85. Financial audit
  86. Financial statements
  87. Financial transaction
  88. Fiscal year
  89. Fixed assets
  90. Fixed assets management
  91. Fixed Assets Register
  92. Forensic accounting
  93. Freight expense
  94. Fund Accounting
  95. Furniture
  96. General journal
  97. General ledger
  98. Generally Accepted Accounting Principles
  99. Going concern
  100. Goodwill
  101. Governmental accounting
  102. Gross income
  103. Gross margin
  104. Gross profit
  105. Gross sales
  106. Historical cost
  107. Hollywood accounting
  108. Imprest system
  109. Income
  110. Income tax
  111. Indirect tax
  112. Insurance
  113. Intangible asset
  114. Interest
  115. Internal Revenue Code
  116. International Accounting Standards
  117. Inventory
  118. Investment
  119. Invoice
  120. Itemized deduction
  121. KPMG
  122. Ledger
  123. Lender
  124. Leveraged buyout
  125. Liability
  126. Licence
  127. Lien
  128. Liquid asset
  129. Long-term assets
  130. Long-term liabilities
  131. Management accounting
  132. Matching principle
  133. Mortgage
  134. Net Income
  135. Net profit
  136. Notes to the Financial Statements
  137. Office equipment
  138. Operating cash flow
  139. Operating expense
  140. Operating expenses
  141. Ownership equity
  142. Patent
  143. Payroll
  144. Pay stub
  145. Petty cash
  146. Preferred stock
  147. PricewaterhouseCoopers
  148. Profit
  149. Profit and loss account
  150. Pro forma
  151. Purchase ledger
  152. Reserve
  153. Retained earnings
  154. Revaluation of fixed assets
  155. Revenue
  156. Revenue recognition
  157. Royalties
  158. Salary
  159. Sales ledger
  160. Sales tax
  161. Salvage value
  162. Shareholder
  163. Shareholder's equity
  164. Single-entry accounting system
  165. Spreadsheet
  166. Stakeholder
  167. Standard accounting practice
  168. Statement of retained earnings
  169. Stock
  170. Stockholders' deficit
  171. Stock option
  172. Stock split
  173. Sunk cost
  174. Suspense account
  175. Tax bracket
  176. Taxes
  177. Tax expense
  178. Throughput accounting
  179. Trade credit
  180. Treasury stock
  181. Trial balance
  182. UK generally accepted accounting principles
  183. United States
  184. Value added tax
  185. Value Based Accounting Standards and Principles
  186. Write-off
 



ACCOUNTING
This article is from:
http://en.wikipedia.org/wiki/Depreciation

All text is available under the terms of the GNU Free Documentation License: http://en.wikipedia.org/wiki/Wikipedia:Text_of_the_GNU_Free_Documentation_License 

Depreciation

From Wikipedia, the free encyclopedia

 
Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years.
Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years.

Depreciation is a term used in accounting, economics and finance with reference to the fact that assets with finite lives lose value over time. (There is also a separate use in international finance to refer to a reduction in the exchange rate of a currency - see devaluation).

In accounting, depreciation is a term used to describe any method of attributing the cost of an asset across its useful life, roughly corresponding to normal wear and tear.[1] It is of most use when dealing with assets of a short, fixed service life, and which lose value over that life.[2]

Depreciation is an example of applying the matching principle as per generally accepted accounting principles. Depreciation in accounting is often mistakenly seen as a basis for recognizing impairment of an asset, but unexpected changes in value, where seen as significant enough to account for, are handled through write-downs or similar techniques which adjust the book value of the asset to reflect its current value. The use of depreciation affects the financial statements and in some countries the taxes of companies and individuals. Depreciation reported for accounting and tax purposes may differ substantially.

Depreciation and its related concept, amortization (generally, the depreciation of intangible assets), are non-cash expenses. Neither depreciation nor amortization will directly affect the cash flow of a company, as both are accounting representations of expenses attributable to a given period. In accounting statements, depreciation may either not figure in the cash flow statement, or may be "added back" to net income (along with other items) to derive the operating cash flow.[3] Depreciation recognized for tax purposes will, however, affect the cash flow of the company, as tax depreciation will reduce taxable profits; there is generally no requirement that treatment of depreciation for tax and accounting purposes be identical. Where depreciation is shown on accounting statements, the figure usually does not relate to depreciation for tax purposes.

In economics depreciation is the decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, is C0 + I - D.

Accounting

A company needs to report depreciation accurately in its financial statements in order to achieve two main objectives. First, to match its expenses with the income generated by means of those expenses. Second, to ensure that the asset values in the balance sheet are not overstated. An asset acquired in Year 1 is unlikely to be worth the same amount in Year 5.

Depreciation is an average or expected view of the decline in value of an asset. For example, an entity may depreciate its equipment by 15% per year. This rate should be reasonable in aggregate (such as when a manufacturing company is looking at all of its machinery), but there is no expectation that each individual item declines in value by the same amount.

Accounting standards bodies have detailed rules on which methods of depreciation are acceptable, and auditors will express a view if they believe the assumptions underlying the estimates do not give a true and fair view.

Recording depreciation

For historical cost purposes, assets are recorded on the balance sheet at their original cost; this is called the book value. Depreciation is not taken out of these assets directly. It is instead recorded in a contra asset account: an asset account with a normal credit balance, typically called "accumulated depreciation". Balancing an asset account with its corresponding accumulated depreciation account will result in the net book value. The net book value will never fall below the salvage value, meaning that once an asset is fully depreciated, no further expenses will be taken during its life. Companies have no obligation to dispose of depreciated assets, of course, and many depreciated assets continue to generate income.

Recording a depreciation expense will involve a credit to an accumulated depreciation account. The corresponding debit will involve either an expense account or an asset account which represents a future expense, such as work in process. Depreciation is recorded as an adjusting journal entry.

A write-down is a form of depreciation that involves a partial write off. Part of the value of the asset is removed from the balance sheet. The reason may be that the book value (accounted value) of the fixed asset has diverged from the market value. An example of this would be a revaluation of goodwill on an acquisition that went bad.

Methods of depreciation

There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.

Straight-line depreciation

Straight-line depreciation is the simplest and most often used technique, in which the company estimates the "salvage value" of the asset after the length of time over which it is depreciated, and assumes the drop in the asset's value is in equal, constant yearly increments over that amount of time. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero. For example, a vehicle that depreciates over 5 years, is purchased at a cost of US$17,000, and will have a "salvage value" of US$2000 will depreciate at US$3,000 per year. ($17,000 − (5 x $3000)) = $2000 In other words it is the cost of the assets divided by number of year of its useful life. If the vehicle were to be sold and the sales price exceeded the depreciated value (net book value) then the excess depreciation would be considered as income by the tax office (capital gains). If the sales price is less than the book value, the resulting capital loss is tax deductible.

If a company chooses to depreciate an asset at a different rate from that used by the tax office then this generates a timing difference in the income statement due to the difference (at a point in time) between the taxation department's and company's view of the profit.

Sinking fund method

A method of depreciation under which the depreciation expense is an amount of an Annuity so that the amount of the annuity at the end of the useful life would equal the Acquisition Cost of the asset. Theoretically, the depreciation charge should include interest on accumulated depreciation at the beginning of the period. This method is rarely used in practice. The sinking fund method allocates more depreciation to the later years.

The depreciation for the first year equals the annual deposit needed for a sinking fund to accumulate at the given rate to an amount that equals the depreciation base.

Then for each consecutive year, the annual depreciation equals the annual sinking fund deposit plus the interest earned on the fund up to that year.

Declining-balance depreciation

As declining-balance method is a type of accelerated depreciation, because it recognizes a higher depreciation cost earlier in an asset's lifetime. This may be a more realistic reflection of an asset's actual resale value, as well as the expected benefit from the use of the asset: many assets are most useful when they are new. In the U.S., a form of declining-balance depreciation, MACRS, is used for tax purposes and is based on time.

In declining-balance depreciation, each period's depreciation is based on the previous year's net book value, the estimated useful life, and a factor. The factor is commonly two; this is known as double declining-balance. Each period we calculate depreciation:

\mbox{Depreciation expense} = \mbox{Previous period NBV} \times {\mbox{factor} \over N}

For the double-declining balance method, using the vehicle example from above, we compute the depreciation after the first year:

\mbox{Previous period NBV} \times {\mbox{factor} \over N} = \$17000 \times {2 \over 5} = \$6800

We subtract $6800 from our previous year's net book value to obtain our new net book value: \mathrm{NBV}_1 = \$17000 - \$6800 = \$10200. For the second year, we use this new value to calculate depreciation. Notice that it is significantly lower than the first year:

\$10200 \times {2 \over 5} = \$4080

This process continues until we reach the salvage value or the end of the asset's useful life. Since declining-balance depreciation doesn't always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset's life. It should also be noted that the book value of the asset being depreciated is never brought below its salvage value, regardless of the method used.

Activity depreciation

Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, we estimate its life in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. We calculate a per-mile depreciation rate: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each year, we then calculate the depreciation expense by multiplying the rate by the actual activity level..

Sum of years digits depreciation

Sum of Years Digits is a historical depreciation method that results in a more accelerated write off than straight line, but less than declining balance or later methods. Salvage value is counted in the method. There are no property classes of later methods.

  • Given;
    • N = Depreciable life of asset
    • B = Cost basis
    • S = Salvage value
    • D(t) = Depreciation charge for year t
    • \mathrm{Sum}={N (N+1) \over 2}
    • D(t)=(N-t+1) \times {(B-S) \over Sum}

Example: If an asset costs $1000, has a depreciable life of 5 years and a salvage value of $90, compute its depreciation schedule.

 

The equation for year 1 would look like this:

D(t)=(5-1+1) \times {(1000-90) \over {5 (5+1) \over 2}} = 303.33

Note: Most depreciation schedules round to the nearest dollar.

Units of Production depreciation

Units of Production depreciation is used in the U.S. in cases where MACRS is inappropriate, and the value to depreciate is based in the asset, such as a mine or natural resources. The method calculates the depreciation based on the units of the asset place in service as compared to the total units of the asset.

Units of time depreciation

Units of Time Depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.

Taxes

When a company spends money for a service or anything else that is short-lived, this expenditure is usually immediately tax deductible, and the company enjoys an immediate tax benefit.[4]

However, when a company buys an asset that will last longer than one year, like a computer, car, or building, the company cannot immediately deduct the cost and enjoy an immediate tax benefit. Instead, the company must depreciate the cost over the useful life of the asset, taking a tax deduction for a part of the cost each year. Eventually the company does get to deduct the full cost of the asset, but this happens over several years; the number of years depends on an estimate of how long it typically takes that type of asset to become effectively useless, and require a replacement. A computer may depreciate completely over five years; a factory building, over 30 years. The maximum allowable useful life estimate under U.S. income tax regulations is 40 years. Other countries have other systems, many of which remove the choice of depreciation rate and method from the company altogether. In these jurisdictions accounting depreciation and tax depreciation are almost always significantly different numbers, as in many instances a form of "accelerated depreciation" can be used for tax purposes to lower (taxable) net income in a given period (or, in some instances, a fixed asset may be allowed to be expensed for tax purposes; Section 179 of the Internal Revenue Code allows for this treatment in some circumstances). Technically, these are not considered "tax reductions" but tax deferrals: lowering taxable income now by increasing expenses should increase future taxable income (and taxes) at a later date.

Economics

In economics, the value of a capital asset is equal to the present value of the flow of services the asset will generate in future, appropriately adjusted for uncertainty. Economic depreciation over a given period is the reduction in the remaining value of future services.

Under certain circumstances, such as an unanticipated increase in the price of the services generated by an asset, its value may increase rather than decline. Depreciation is then negative.

National accounts

In national accounts, depreciation represents the decline in the aggregate capital stock arising from the use of capital in production, also referred to as consumption of fixed capital. Hence, depreciation is equal to the difference between aggregate (gross) investment and net investment or between Gross National Product and Net National Product. Unlike depreciation in business accounting, depreciation in national accounts is, in principle, not a method of allocating the costs of past expenditures on fixed assets over subsequent accounting periods. Rather, fixed assets at a given moment in time are valued according to the remaining benefits derived from their use.

Further reading

  1. ^ Beginner's Guide to Financial Statements by the US Securities and Exchange Commission
  2. ^ Asset and digital asset management
  3. ^ ISAB standards on the treatment of goodwill and other intangible assets
  4. ^ IRS small business tax guide

See also

  • John I. Beggs (1847-1925) - The American businessman responsible for modern depreciation techniques
  • Amortization
  • Expense
  • Consumption of fixed capital
  • Tax depletion
  • Cost Segregation Studies
  • Deferred tax

External links

  • Depreciation Accelerated depreciation, book vs. tax depreciation, use of estimates, journal entries...
  • Fixed Asset Info Automatic depreciation calculator, tax and other accounting links, depreciation classes, and more...
Retrieved from "http://en.wikipedia.org/wiki/Depreciation"

  

 

 


 

 
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