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AccountingTermsDictionary |
| U.S. GAAP Codification | Accounting Topics |
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Accounting Terms Dictionary |
| Principles of Accounting, U.S. GAAP Financial Reporting Guide |
| Accounting by Topic, Accounting Terms Dictionary |
| Accounting Terms Dictionary |
| Depreciation of Property, Plant and Equipment |
| Depreciation of Property, Plant and Equipment 1. Depreciation is a process of allocating the cost of a long-lived asset. 2. If an asset is used for more than one accounting period --> the cost of an asset is allocated to each period 3. Depreciation method should be --> systematic and rational 4. Depreciation methods (1) straight line depreciation (2) double declining balance method (3) sum-of-the-years'-digits method (4) production based method 5. straight line depreciation (1) depreciation base is equally allocated to each period (2) depreciation base = cost - residual value (3) depreciation amount = (cost - residual value) x 1/useful life of an asset 6. double declining balance method (1) depreciation amount = beginning book value x depreciation rate (2) book value = cost of an asset - accumulated depreciation (3) beginning book value = balance of book value at the beginning of period = equals to book value at the end of previous period (4) depreciation rate = (1/useful life) x 200% --> because 200% is multiplied --> this method is called "double" declining balance method 7. 150% declining balance method (1) depreciation rate = (1/useful life) x 150% 8. sum-of-the-years'-digits method (1) depreciation amount = (cost - residual value) x depreciation rate for that period (2) depreciation rate is determined as follows: If the useful life of an asset is N periods --> Sum-of-the-years'-digits = 1 + 2 + 3 + ... + N = N x (N+1) / 2 If useful life is 5 years --> Sum-of-the-years'-digits = 1 + 2 + 3 + 4 + 5 = 5 x (5 + 1) / 2 = 30 / 2 = 15 depreciation rate --> for period 1 = 5 / 15 --> for period 2 = 4 / 15 --> for period 3 = 3 / 15 --> for period 4 = 2 / 15 --> for period 5 = 1 / 15 9. Production based method (1) If an asset is designed to produce certain number of product units --> depreciation amount = (cost - residual value) x (A) / (B) --> (A) = number of products produced during the period --> (B) = total number of product units expected from an asset (2) If an asset is designed to be used for certain number of usage hours --> depreciation amount = (cost - residual value) x (C) / (D) --> (C) = number of hours used during the period --> (D) = total number of usage hours expected from an asset Examples of Depreciation 1. Straight line depreciation examples 2. Double declining balance method example 1 3. Double declining balance method example 2 |
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