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Explain the Depreciation, objectives for calculating the
depreciation and various method for calculating depreciation
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Answer Posted / shubhangi
Depreciation expense is calculated utilizing either a
straight line depreciation method or an accelerated
depreciation method. The straight line method calculates
depreciation by spreading the cost evenly over the life of
the fixed asset. Accelerated depreciation methods such as
declining balance and sum of years digits calculate
depreciation by expensing a large part of the cost at the
beginning of the life of the fixed asset.
What is Depreciation?
Depreciation is defined as an accounting methodology which
allows an organization to spread the cost of a fixed asset
over the expected useful life of that asset. The cost of
the fixed asset immediately comes out of the cash account
of the organization and is entered as an asset for the
organization. At the end of each period of the useful life
of the asset a part of the cost is expensed. This amount is
added to the accumulated depreciation for the asset. The
net value of the asset on the books of the organization is
the asset account less the accumulated depreciation
account.
A fixed asset is considered depreciable if it will wear out
or become obsolete over a period of years. The period of
years is called the life or the useful life of the item.
The life that is assigned to an item will depend on
industry standards, management standards, and governmental
regulations. Generally, depreciable items include
buildings, manufacturing equipment, office equipment, and
vehicles. Land is not considered a depreciable item as it
does not wear out or become obsolete.
Some fixed assets may be expected to have a market value at
the end of their useful life. This expected value is called
the salvage value. Some organizations set this value on a
per asset basis, some use a percentage of the purchase
price, some assume that all assets will have zero salvage
value, and some use a combination of these methods.
Organizations usually set a price at which a fixed asset is
considered depreciable. Any asset purchased at less than
the set price is immediately expensed. This eliminates the
need to track every waste basket, stapler, hammer, wrench,
desk lamp, etc. Some organizations set this as low as
$100.00. Other organizations set it at $10,000.00 or more.
Once this limit has been set it should be adhered to and
should not be reset every year
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