Depreciation Topics

• cash flow statement
• double declining balance method
• salvage value
• cash inflow
• accounting statements
• operating cash flow
• double declining balance
• asset account
• scrap value
• accounting depreciation
• capital stock
• credit balance
• residual value
• time book
• unexpected changes
• original cost
• nuclear materials
• current value
• asse
• salvage

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Depreciation, Depreciation

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.

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 neither figure in the cash flow statement, nor be "added back" to net income (along with other items) to derive the operating cash flow.

Where depreciation is shown on accounting statements, the figure usually does not match the depreciation for tax purposes.

In accounting, the salvage value of an asset is its remaining value after depreciation. This is also known as residual value or scrap value. It is the net cash inflow that occurs when the asset is liquefied at the end of its life. Salvage value can be negative if the residual asset requires special treatment to terminatefor example, used nuclear materials or CRT's containing lead.

If capital stock is C_0 at the beginning of a period, investment is I and depreciation D , the capital stock at the end of the period, C_1 , is C_0 + I - D.

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.

At any time book value equals original cost minus accumulated depreciation.

For this reason, this technique is referred to as the double-declining-balance method . To illustrate, suppose a business has an asset with $1,000 Original Cost, $100 Salvage Value, and 5 years useful life.First, calculate straight-line depreciation rate. Since the asset has 5 years useful life, the straight-line depreciation rate equals (100% / 5) 20% per year. With double-declining-balance method, as the name suggests, double that rate, or 40% depreciation rate is used.

At any time Book Value equals Original Cost minus Accumulated Depreciation.

In the last year of depreciation a subtraction might be needed in order to prevent Book Value from falling below estimated Scrap Value.

This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each year, the depreciation expense is then calculated by multiplying the rate by the actual activity level.

Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions.

Depreciation charge per unit is computed by dividing Depreciable Cost by Total Units, expected to be produced during the useful life of the asset.

Depreciation Expense equals Depreciation per Unit multiplied by the number of units produced during the year.

In the end the sum of Accumulated Depreciation and Scrap Value equals to the Original Cost.

Depending on the number of projects, the equipment will be used and depreciation charged accordingly.

For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-line-depreciation method.

Debit the difference between the two to Accumulated Depreciation. Under the Composite method no gain or loss is recognized on the sale of an asset.

The maximum allowable useful life under US income tax regulations is 40 years. Though the IRS does allow a small choice of permutations for depreciation life and acceleration, it does not allow a taxpayer to invent any arbitrary asset life. Other countries have other systems, many simply eliminate all choice 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.

Economic depreciation over a given period is the reduction in the remaining value of future services.

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 to be derived from their use.

Source: Wikipedia > Depreciation