An explanatory article on depreciation and two methods of depreciating an asset

Prime cost straight line and diminishing value methods In most cases, you can choose to use either of two alternative methods for calculating depreciation: The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The diminishing value method assumes that the value of a depreciating asset decreases more in the early years of its effective life. To calculate depreciation for most assets for a particular income year, you can use the Decline in value calculatorwhich compares results of the two methods and also provides disposal outcomes.

An explanatory article on depreciation and two methods of depreciating an asset

In accordance with generally accepted accounting principles, or GAAP, a company reports all assets on its balance sheet. The balance sheet is a listing of the company's assets and liabilities.

One of the most common types of assets is fixed assets. Fixed assets are assets a company holds for a long period of time, such as buildings, land and equipment. Step 1 Account for all of your fixed assets.

History of IAS 16

An asset is considered fixed when it sustains value over a number of years. Examples include buildings, machinery and equipment. Compile a list of all assets that you own. Step 2 Assign a value to the fixed assets. According to the cost assumption under GAAP, report the value of the asset as the cost at which it was purchased.

Step 3 Determine a method to assess depreciation. Fixed assets lose value over a period of time known as the useful life of the asset. For straight-line depreciation, continue to Step 4. For reducing balance depreciation, skip ahead to to Step 5.

An explanatory article on depreciation and two methods of depreciating an asset

Step 4 Calculate straight line depreciation by dividing the cost of the asset by its useful life. Skip ahead to Step 6. Step 5 Calculate reducing balance depreciation by calculating the percentage of depreciation each year.

Divide 27, by 30, The truck is at 90 percent of its value after year one, meaning it decreases in value 10 percent each year, giving it a useful life of 10 years. Step 6 Apply the decided depreciation method to the cost of the asset based on how far into its useful life the asset is.

Report this figure onto the balance sheet to account for the asset in accordance with GAAP. Department of Housing and Urban Development: Accounting for Fixed Assets About the Author Carl Carabelli has been writing in various capacities for more than 15 years.

He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces.

Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since Sep 10,  · Depreciation is an allowance for the decline in value of a long-lived capital asset.

In theory, it should equal the cost of replacement when the asset ceases to have value. Accelerated deprecation represents that which is written off faster than the useful life of an asset.

Reason of Depreciation

(a) Depreciation is the method for allocating the cost of fixed assets to periods benefitting from asset use. The non-Federal entity may be compensated for the use of its buildings, capital improvements, equipment, and software projects capitalized in accordance with GAAP, provided that they are.

As depreciation is recorded, the total amount accrued is reported on your balance sheet as an offset to asset values stated. For example, you might show equipment of $50, and accumulated depreciation .

Method of Recording Depreciation: Creating Provision for Depreciation Account/Accumulated Depreciation Account: This method is designed to accumulate the depreciation provided on an asset in a separate account generally called ‘Provision for Depreciation’ or ‘Accumulated Depreciation’ account.

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