DEPRECIATION

DEPRECIATION

To reflect effect of time and use on assets value in firms financial statements.

PURPOSE OF DEPRECIATION

To provide for the recovery of capital that has been invested in physical property.

To enable the cost of depreciation to be charged to the cost of producing products or services that result from the use of property.

PROPERTY IS DEPRECIABLE IF IT MUST:

Be used in business

Have a determinable useful life which is longer than one year

Not be inventory, stoch in trade or investment property

WHEN DEPRECIATION STARTS AND STOP?

START : When property is placed in service for use in business or for production of income.

STOPS: When cost is placing it in service is removed or it is retired from service.p

DEPRECIATION CONCEPTS;

BOOK VALUE (BV)

MARKET VALUE (MV)

RECOVERY PERIOD

RECOVERY RATE

SALVAGE VALUE (SV)

BOOK VALUE (BV)

Worth of depreciable property as shown on accounting records.

MARKET VALUE (MV)

Amount paid by willing buyer to willing seller for property where no advantage and compulsion to transact.

RECOVERY PERIOD

Number of years ehich basis of property is recovered through accounting process.

RECOVERY RATE

Percentage for each year of MACRS recovery period used to calculate an annual depreciation deduction.

SALVAGE VALUE (SV)

Estimated value of property at the end of useful life.

STRAIGHT LINE METHOD

Assumed constant amount is depreciated each year over depreciable useful life.

SINKING FUND FORMULA

It is assumed that a sinking fund is established in which funds will accumulate for replacement purposes and will beat interest.

SUM OF THE YEARS DIGITS METHOD (SYD)

Number for each permissable year of life are listed in reverse order.

DECLINING BALANCE METHOD (DB)

Sometimes called constant percentage method or matheson formula.

Assumed annual cost of depreciation is fixed percentage of BV at beginning of year.