DEPRECIATION

DEPRECIATION - DEPRECIATION Depreciation refers to a cost...

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DEPRECIATION Depreciation refers to a cost allocation of tangible plant assets. Depletion is the term used to describe the cost allocation related to natural resources such as timber, oil, or coal. Amortization is the term used to describe the expiration of intangible assets. In addition to a thorough discussion of the accounting problems involved, the chapter presents a detailed analysis and explanation of the various depreciation and write off methods used in practice. Depreciation Process Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. The cost allocation approach is justified because it matches costs with revenues and because fluctuation in market values is difficult to determine. To compute depreciation, an accountant must establish (a) the depreciable base to be used for the asset, (b) the asset’s useful life, and (c) the depreciation method to be used. Determination of the first two factors requires the use of estimates. The depreciable base is the difference between an asset’s cost and its salvage value. Salvage value is the estimated amount that will be received at the time the asset is sold or removed from service. The useful life (service life) of a plant asset refers to the number of years that asset is capable of economically providing the service it was purchased to perform. The service life of an asset should not be confused with its physical life. For example, a machine may no longer provide a useful
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This note was uploaded on 10/07/2010 for the course FIN 3162N taught by Professor Spencer during the Spring '10 term at Dowling.

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DEPRECIATION - DEPRECIATION Depreciation refers to a cost...

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