Understanding Depreciation Methods and Factors
Learn about depreciation, its concepts, methods, and factors involved in the cost allocation process. Understand how to calculate depreciation base and make informed decisions on asset management.
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Presentation Transcript
11 Depreciation LEARNING OBJECTIVES 1. Explain the concept of depreciation. 2. Identify the factors involved in the depreciation process. 3. Compare activity, straight-line, and diminishing-charge methods of depreciation. 11-1
DEPRECIATIONMETHOD OF COST ALLOCATION 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. Allocating costs of long-lived assets: Fixed assets = Depreciation expense Intangibles = Amortization expense Mineral resources = Depletion expense LO 1 11-2
DEPRECIATIONCOST ALLOCATION Factors Involved in the Depreciation Process Three basic questions: 1. What depreciable base is to be used? 2. What is the asset s useful life? 3. What method of cost apportionment is best? LO 2 11-3
Factors Involved in Depreciation Process Estimation of Service Lives Service life often differs from physical life. Companies retire assets for two reasons: 1. Physical factors (casualty or expiration of physical life). 2. Economic factors (inadequacy, supersession, and obsolescence). LO 2 11-4
Factors Involved in Depreciation Process Depreciable Base for the Asset ILLUSTRATION 11-1 Computation of Depreciation Base LO 2 11-5
