depreciation

/dapriyshiyeyshsn/ In accounting, spreading out the cost of a capital asset over its estimated useful life. Depreciation expense reduces the taxable income of an entity but does not reduce the cash. A decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property. State Highway Commission v. Tubbs, 147 Mont. 296, 411 P.2d 739, 744. Consistent, gradual process of estimating and allocating cost of capital investments over estimated useful life of asset in order to match cost against earnings. Coca-Cola Bottling Co. of Baltimore v. U.S., 203 Ct.Cl. 18, 487 F.2d 528, 534. The depreciation expense recorded on the entity's tax return may differ from that recorded on the entity's financial statements. An entity usually uses an accelerated method on its tax return and the straight-line method on its financial statements due to the larger write-offs in the early years.

As to intangible assets, see amortization.

As to natural resources, see depletion.

See also Accelerated Cost Recovery System

- accrued depreciation

- annual depreciation

- Asset Depreciation Range

- recapture of depreciation

- useful life.

Depreciation Methods:

Accelerated depreciation. Various methods of depreciation that yield larger deductions in the earlier years of the life of an asset than the straight-line method. Examples include the double declining-balance and the sum of the years' digits methods of depreciation.

Accrued depreciation.

See accrued depreciation, and accumulated depreciation, below.

Accumulated depreciation. Total depreciation recorded on an asset to date. On the balance sheet, accumulated depreciation reflects the book value of an asset.

See also accrued depreciation

@ accelerated depreciation

Various methods of depreciation that yield larger deductions in the earlier years of the life of an asset than the straight-line method. Examples include the double declining-balance and the sum of the years' digits methods of depreciation.

+ accelerated depreciation

Various methods of depreciation that yield larger deductions in the earlier years of the life of an asset than the straight-line method. Examples include the double declining-balance and the sum of the years' digits methods of depreciation.

See Accelerated Cost Recovery System

- depreciation

@ accumulated depreciation

Total depreciation recorded on an asset to date. On the balance sheet, accumulated depreciation reflects the book value of an asset.

See also accrued depreciation

@ declining balance method

Under the declining balance method, the annual depreciation allowance is computed by multiplying the undepreciated cost of the asset each year by a uniform rate up to double the straight-line rate or 150 percent, as the case may be

@ double declining method

Spreading the initial cost of a capital asset over time by deducting in each period double the percentage recognized by the straight-line method and applying that double percentage to the undepreciated balance existing at the start of each period. No salvage value is used in the calculation.

@ replacement cost method

The amortization or depreciation of an asset in which the value is fixed in terms of replacement cost.

@ sinking fund method

A process of recovering the value of an asset by setting up a sinking fund.

@ straight-line method

Under the straight-line method of depreciation, the cost or other basis (e.g., fair market value in the case of donated assets) of the asset, less its estimated salvage value, if any, is determined first; then this amount is written off in equal amounts over the period of the estimated useful life of the asset. Taking the initial cost of a capital asset, deducting the expected salvage value at the time it is expected to be discarded, and spreading the difference in equal installments per unit of time over an estimated life of the asset.

@ sum-of-the-year's digits method

Under this method, the annual depreciation allowance is computed by multiplying the depreciable cost basis (cost less salvage value) by a constantly decreasing fraction. The numerator of the fraction is represented by the remaining years of useful life of the asset at the beginning of each year, and the denominator is always represented by the sum of the years' digits of useful life at the time of acquisition.

@ unit method

A depreciation or amortization method used in which an asset is written off in direct relation to the productivity of the asset. The cost of the asset is divided by the estimated total number of units to be produced, "(This unit cost is then multiplied by the number of units sold during the year resulting in the depreciation of amortization expense for the year

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