ANSWERS: 1
  • Depreciation is the accounting term associated with the concept of usage. It's the way in which bookkeepers keep track of the loss in value for a particular asset due to usage or natural wear and tear. The primary depreciation method used is the straight-line method. There are also two main accounts that are used to reduce the book value of an asset: depreciation expense and accumulated depreciation. Book value is considered to be the actual value of the asset.

    Straight-Line Depreciation

    The straight-line depreciation method writes off an equal value each year of the asset's useful life. To apply this method, you'll need to know the expected life of the asset. Most pieces of equipment come with an estimate; you can also have the item appraised. Determine the salvage value of the asset. This is the value of the asset or equipment after it's no longer useful. For instance, some pieces of equipment may have a scrap value.

    Depreciation Expense

    Let's walk through an example to understand depreciation expense. The straight-line depreciation expense equals the cost of the asset divided by its useful life. If a piece of equipment costs $50,000 and has an expected life of five years with a salvage value of $10,000, the calculation would be ($50,000 -- $10,000)/5 = $40,000/5 = $8,000. This is the amount that you can reduce the value of the equipment every year to account for depreciation.

    Accumulated Depreciation

    Let's walk through the effect of this transaction on each account associated with depreciation. In Year 1, the book value of the equipment is $50,000. The depreciation expense is $8,000. At the end of Year 1, the new book value of the equipment is $42,000 ($50,000 -- $8,000). Accumulated depreciation is now $8,000. At the end of Year 2, the new book value of the equipment is $34,000 ($42,000 -- $8,000), and the accumulated depreciation account increases to $16,000. Depreciation expense stays the same each year; however, the book value of the equipment is reduced by the depreciation expense every year. Accumulated depreciation increases as the asset ages.

    Source:

    Assetaide.com: Depreciation Example

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