Depreciation
Overview
 
Depreciation refers to two very different but related concepts:
  1. the decrease in value of assets (fair value
    Fair value
    Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...

     depreciation), and
  2. the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle
    Matching principle
    The matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are incurred The matching principle...

    ).

The former affects values of businesses and entities. The latter affects net income. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used.
Encyclopedia
Depreciation refers to two very different but related concepts:
  1. the decrease in value of assets (fair value
    Fair value
    Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...

     depreciation), and
  2. the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle
    Matching principle
    The matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are incurred The matching principle...

    ).

The former affects values of businesses and entities. The latter affects net income. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. Such expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

 is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. Example: a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500.

In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, depreciation is the gradual decrease in the economic value
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...

 of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is at the beginning of a period, investment is and depreciation , the capital stock at the end of the period, , is .

Accounting concept

In determining the profits (net income) from an activity, the receipts from the activity must be reduced by appropriate costs. One such cost is the cost of assets used but not currently consumed in the activity. Such costs must be allocated to the period of use. The cost of an asset so allocated is the difference between the amount paid for the asset and the amount expected to be received upon its disposition. Depreciation is any method of allocating such net cost to those periods expected to benefit from use of the asset. The asset is referred to as a depreciable asset. Depreciation is a method of allocation, not valuation.

Any business or income producing activity using tangible assets may incur costs related to those assets. Where the assets produce benefit in future periods, the costs must be deferred rather than treated as a current expense. The business then records depreciation expense as an allocation of such costs for financial reporting. The costs are allocated in a rational and systematic manner as depreciation expense to each period in which the asset is used, beginning when the asset is placed in service. Generally this involves four criteria:
  • cost of the asset,
  • expected salvage value, also known as residual value of the asset,
  • estimated useful life of the asset, and
  • a method of apportioning the cost over such life.

Depreciable basis

Cost generally is the amount paid for the asset, including all costs related to acquisition. In some countries or for some purposes, salvage value may be ignored. The rules of some countries specify lives and methods to be used for particular types of assets. However, in most countries the life is based on business experience, and the method may be chosen from one of several acceptable methods.

Net basis

When a depreciable asset is sold, the business recognizes gain or loss based on net basis of the asset. This net basis is cost less depreciation.

Impairment

Accounting rules also require that an impairment charge or expense be recognized if the value of assets declines unexpectedly. Such charges are usually nonrecurring, and may relate to any type of asset.

Depletion and amortization

Depletion
Depletion
Depletion may refer to:*Depletion , an accounting concept*Depletion region, a concept of semiconductor physics*Depletion width, a concept of semiconductor physics*Grain boundary depletion, a mechanism of corrosion...

 and amortization
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

 are similar concepts for mineral assets (including oil) and intangible assets, respectively.

Effect on cash

Depreciation expense does not require current outlay of cash. However, the cost of acquiring depreciable assets may require such outlay. Thus, depreciation does not affect a statement of cash flows, but cost of acquiring assets does.

Historical cost

Depreciation is generally recognized under historical cost systems of accounting. Some proposals for fair value accounting have no provision for systematic depreciation expense.

Accumulated depreciation


While depreciation expense is recorded on the income statement of a business, its impact is generally recorded in a separate account and disclosed on the balance sheet as accumulated depreciation, under fixed assets, according to most accounting principles. Accumulated depreciation is known as a contra account, because it separately shows a negative amount that is directly associated with another account.

Without an accumulated depreciation account on the balance sheet, depreciation expense is usually charged against the relevant asset directly. The values of the fixed assets stated on the balance sheet will decline, even if the business has not invested in or disposed of any assets. The amounts will roughly approximate fair value. Otherwise, depreciation expense is charged against accumulated depreciation. Showing accumulated depreciation separately on the balance sheet has the effect of preserving the historical cost of assets on the balance sheet. If there have been no investments or dispositions in fixed assets for the year, then the values of the assets will be the same on the balance sheet for the current and prior year.

Methods of depreciation


There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.

Straight-line depreciation

Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is also known as scrap value or residual value
Residual value
Residual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial value....

.

Straight-line method:

For example, a vehicle that depreciates over 5 years, is purchased at a cost of US$17,000, and will have a salvage value of US$2000, will depreciate at US$3,000 per year: ($17,000 − $2,000)/ 5 years = $3,000 annual straight-line depreciation expense. In other words, it is the depreciable cost of the asset
divided by the number of years of its useful life.

This table illustrates the straight-line method of depreciation. Book value at the beginning of the first year of depreciation is the original cost of the asset. At any time book value equals original cost minus accumulated depreciation.

book value = original cost − accumulated depreciation
Book value at the end of year becomes book value at the beginning of next year. The asset is depreciated until the book value equals scrap value.
Book value at
beginning of year
Depreciation
expense
Accumulated
depreciation
Book value at
end of year
$17,000 (original cost) $3,000 $3,000 $14,000
$14,000 $3,000 $6,000 $11,000
$11,000 $3,000 $9,000 $8,000
$8,000 $3,000 $12,000 $5,000
$5,000 $3,000 $15,000 $2,000 (scrap value)


If the vehicle were to be sold and the sales price exceeded the depreciated value (net book value) then the excess would be considered a gain and subject to depreciation recapture
Depreciation recapture
Depreciation recapture is the USA Internal Revenue Service procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation...

. In addition, this gain above the depreciated value would be recognized as ordinary income by the tax office. If the sales price is ever less than the book value, the resulting capital loss is tax deductible. If the sale price were ever more than the original book value, then the gain above the original book value is recognized as a capital gain.

If a company chooses to depreciate an asset at a different rate from that used by the tax office then this generates a timing difference in the income statement due to the difference (at a point in time) between the taxation department's and company's view of the profit.

Declining-balance method (or Reducing balance method)

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods.
This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new.
One popular accelerated method is the declining-balance method. Under this method the book value is multiplied by a fixed rate.

Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year

The most common rate used is double the straight-line rate. 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. The table below illustrates the double-declining-balance method of depreciation.
Book value at
beginning of year
Depreciation
rate
Depreciation
expense
Accumulated
depreciation
Book value at
end of year
$1,000 (original cost) 40% $400 $400 $600
$600 40% $240 $640 $360
$360 40% $144 $784 $216
$216 40% $86.40 $870.40 $129.60
$129.60 $129.60 - $100 $29.60 $900 $100 (scrap value)


When using the double-declining-balance method, the salvage value is not considered in determining the annual depreciation, but the book value of the asset being depreciated is never brought below its salvage value, regardless of the method used. The process continues until the salvage value or the end of the asset's useful life, is reached. In the last year of depreciation a subtraction might be needed in order to prevent book value from falling below estimated Scrap Value.

Since double-declining-balance depreciation does not always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset's life.

It is possible to find a rate that would allow for full depreciation by its end of life with the formula:

,

where N is the estimated life of the asset (for example, in years).

Activity depreciation

Activity depreciation methods are not based on time, but on a level of activity. 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.

Sum-of-years' digits method

Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method. Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions.

depreciable cost = original cost − salvage value

book value = original cost − accumulated depreciation

Example: If an asset has original cost of $1000, a useful life of 5 years and a salvage value of $100, compute its depreciation schedule.

First, determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1.

Next, calculate the sum of the digits. 5+4+3+2+1=15

The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to the useful life of the asset. The example would be shown as (52+5)/2=15

Depreciation rates are as follows:

5/15 for the 1st year,
4/15 for the 2nd year,
3/15 for the 3rd year,
2/15 for the 4th year, and
1/15 for the 5th year.
Book value at
beginning of year
Total
depreciable
cost
Depreciation
rate
Depreciation
expense
Accumulated
depreciation
Book value at
end of year
$1,000 (original cost) $900 5/15 $300 ($900 * 5/15) $300 $700
$700 $900 4/15 $240 ($900 * 4/15) $540 $460
$460 $900 3/15 $180 ($900 * 3/15) $720 $280
$280 $900 2/15 $120 ($900 * 2/15) $840 $160
$160 $900 1/15 $60 ($900 * 1/15) $900 $100 (scrap value)

Units-of-production depreciation method

Under the units-of-production method, useful life of the asset is expressed in terms of the total number of units expected to be produced:


Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.

Depreciation per unit = ($70,000−10,000) / 6,000 = $10

10 × actual production will give the depreciation cost of the current year.

The table below illustrates the units-of-production depreciation schedule of the asset.
Book value at
beginning of year
Units of
production
Depreciation
cost per unit
Depreciation
expense
Accumulated
depreciation
Book value at
end of year
$70,000 (original cost) 1,000 $10 $10,000 $10,000 $60,000
$60,000 1,100 $10 $11,000 $21,000 $49,000
$49,000 1,200 $10 $12,000 $33,000 $37,000
$37,000 1,300 $10 $13,000 $46,000 $24,000
$24,000 1,400 $10 $14,000 $60,000 $10,000 (scrap value)


Depreciation stops when book value is equal to the scrap value of the asset. In the end, the sum of accumulated depreciation and scrap value equals the original cost.

Units of time depreciation

Units of time depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.

A simple example can be given for construction companies, where some equipment is used only for some specific purpose. Depending on the number of projects, the equipment will be used and depreciation charged accordingly.

Group depreciation method

Group depreciation method is used for depreciating multiple-asset accounts using straight-line-depreciation method. Assets must be similar in nature and have approximately the same useful lives.
Asset Historical
cost
Salvage
value
Depreciable
cost
Life Depreciation
per year
Computers $5,500 $500 $5,000 5 $1,000

Composite depreciation method

The composite method is applied to a collection of assets that are not similar, and have different service lives. 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.
Asset Historical
cost
Salvage
value
Depreciable
cost
Life Depreciation
per year
Computers $5,500 $500 $5,000 5 $1,000
Printers $1,000 $100 $ 900 3 $ 300
Total $ 6,500 $600 $5,900 4.5 $1,300

Composite life equals the total depreciable cost divided by the total depreciation per year.
$5,900 / $1,300 = 4.5 years.

Composite depreciation rate equals depreciation per year divided by total historical cost.
$1,300 / $6,500 = 0.20 = 20%

Depreciation expense equals the composite depreciation rate times the balance in the asset account (historical cost). (0.20 * $6,500) $1,300.
Debit depreciation expense and credit accumulated depreciation.

When an asset is sold, debit cash for the amount received and credit the asset account for its original cost. 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. Theoretically, this makes sense because the gains and losses from assets sold before and after the composite life will average themselves out.

To calculate composite depreciation rate, divide depreciation per year by total historical cost.
To calculate depreciation expense, multiply the result by the same total historical cost. The result, not surprisingly, will equal to the total depreciation Per Year again.

Common sense requires depreciation expense to be equal to total depreciation per year, without first dividing and then multiplying total depreciation per year by the same number.

Tax depreciation

Most income tax systems allow a tax deduction
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...

 for recovery of the cost of assets used in a business or for the production of income. Such deductions are allowed for individuals and companies. Where the assets are consumed currently, the cost may be deducted currently as an expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

 or treated as part of cost of goods sold
Cost of goods sold
Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

. The cost of assets not currently consumed generally must be deferred and recovered over time, such as through depreciation. Some systems permit full deduction of the cost, at least in part, in the year the assets are acquired. Other systems allow depreciation expense over some life using some depreciation method or percentage. Rules vary highly by country, and may vary within a country based on type of asset or type of taxpayer. Many systems that specify depreciation lives and methods for financial reporting require the same lives and methods be used for tax purposes. Most tax systems provide different rules for real property (buildings, etc.) and personal property (equipment, etc.).

Capital allowances

A common system is to allow a fixed percentage of the cost of depreciable assets to be deducted each year. This is often referred to as a capital allowance, as it is called in United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

. Deductions are permitted to individuals and businesses based on assets placed in service during or before the assessment year. Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

's Capital Cost Allowance
Capital Cost Allowance
Capital Cost Allowance is effectively the means by which Canadian businesses may claim depreciation expense. Depreciable items are deemed to belong to different classes which depreciate at different rates and are subject to different rules...

 are fixed percentages of assets within a class or type of asset. Fixed percentage rates are specified by type of asset. The fixed percentage is multiplied by the tax basis of assets in service to determine the capital allowance deduction. The tax law or regulations of the country specifies these percentages. Capital allowance calculations may be based on the total set of assets, on sets or pools by year (vintage pools) or pools by classes of assets.

Tax lives and methods

Some systems specify lives based on classes of property defined by the tax authority. Canada Revenue Agency specifies numerous classes based on the type of property and how it is used. Under the United States depreciation system
MACRS
The Modified Accelerated Cost Recovery System is the current tax depreciation system in the United States. Under this system, the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal...

, the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 publishes a detailed guide which includes a table of lives based on types of businesses in which assets are used. The table also incorporates specified lives for certain commonly used assets (e.g., office furniture, computers, automobiles) which override the business use lives. U.S. tax depreciation is computed under the double declining balance method switching to straight line or the straight line method, at the option of the taxpayer. IRS tables specify percentages to apply to the basis of an asset for each year in which it is in service. Depreciation first becomes deductible when an asset is placed in service.

Additional depreciation

Many systems allow an additional deduction for a portion of the cost of depreciable assets acquired in the current tax year. The UK system provides a first year capital allowance of £50,000. In the United States, two such deductions are available. A deduction for the full cost of depreciable tangible personal property is allowed up to $250,000. This deduction is fully phased out for businesses acquiring over $800,000 of such property during the year. In addition, additional first year depreciation of 50% of the cost of most other depreciable tangible personal property is allowed as a deduction. Some other systems have similar first year or accelerated allowances.

Real property

Many tax systems prescribe longer depreciable lives for buildings and land improvements. Such lives may vary by type of use. Many such systems, including the United States and Canada, permit depreciation for real property using only the straight line method, or a small fixed percentage of cost. Generally, no depreciation tax deduction is allowed for bare land. In the United States, residential rental buildings are depreciable over a 27.5 year or 40 year life, other buildings over a 39 or 40 year life, and land improvements over a 15 or 20 year life, all using the straight line method.

Averaging conventions

Depreciation calculations can become complex if done for each asset a business owns. Many systems therefore permit combining assets of a similar type acquired in the same year into a “pool.” Depreciation is then computed for all assets in the pool as a single calculation. Calculations for such pool must make assumptions regarding the date of acquisition. The United States system allows a taxpayer to use a half year convention for personal property or mid-month convention for real property. Under such a convention, all property of a particular type is considered acquired at the midpoint of the acquisition period. One half of a full period depreciation is allowed in the acquisition period and in the final depreciation period. United States rules require a mid-quarter convention for personal property if more than 40% of the acquisitions for the year are in the final quarter.

Models

In economics, the value of a capital asset may be modeled as the present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...

 of the flow of services the asset will generate in future, appropriately adjusted for uncertainty. Economic depreciation over a given period is the reduction in the remaining value of future services.

Under certain circumstances, such as an unanticipated increase in the price of the services generated by an asset or a reduction in the discount rate
Discount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....

, its value may increase rather than decline. Depreciation is then negative.

Depreciation can alternatively be measured as the change in the market value of capital over a given period: the market price of the capital at the beginning of the period minus its market price at the end of the period.

Such a method in calculating depreciation differs from other methods, such as straight-line depreciation in that it is included in the calculation of implicit cost
Implicit cost
In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly...

, and thus economic profit.

Modeling depreciation of a durable as delivering the same services from purchase until failure, with zero scrap value (rather than slowing degrading and retaining residual value
Residual value
Residual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial value....

), is referred to as the light bulb model of depreciation, or more colorfully as the one-hoss shay model, after a poem by Oliver Wendell Holmes, Sr.
Oliver Wendell Holmes, Sr.
Oliver Wendell Holmes, Sr. was an American physician, professor, lecturer, and author. Regarded by his peers as one of the best writers of the 19th century, he is considered a member of the Fireside Poets. His most famous prose works are the "Breakfast-Table" series, which began with The Autocrat...

, about a carriage which worked perfectly for exactly one hundred years, then fell completely apart in an instant.

National accounts

In national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...

 the decline in the aggregate capital stock
Physical capital
In economics, physical capital or just 'capital' refers to any already-manufactured asset that is applied in production, such as machinery, buildings, or vehicles. In economic theory, physical capital is one of the three primary factors of production, also known as inputs in the production function...

 arising from the use of fixed assets in production is referred to as consumption of fixed capital
Consumption of fixed capital
Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...

 (CFC). Hence, CFC is equal to the difference between aggregate gross fixed capital formation
Gross fixed capital formation
Gross fixed capital formation is a macroeconomic concept used in official national accounts such as the UNSNA, NIPAs and the European System of Accounts . The concept dates back to the NBER studies of Simon Kuznets of capital formation in the 1930s, and standard measures for it were adopted in the...

 (gross
Gross (economics)
In economics, gross means before deductions. The antonym is net, meaning after deductions.-Usage:In this sense, it may appear an adjective, following the noun it modifies, e.g., "earned two million dollars, gross"...

 investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

) and net fixed capital formation (net investment
Net investment
In economics, net investment refers to an activity of spending which increases the availability of fixed capital goods or means of production. It is the total spending on new fixed investment minus replacement investment, which simply replaces depreciated capital goods....

) or between Gross National Product and Net National Product
Net National Product
Net national product is the total market value of all final goods and services produced by residents in a country or other polity during a given time period minus depreciation...

. Unlike depreciation in business accounting, CFC 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.

See also

  • Amortization
    Amortization
    Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

  • Consumption of fixed capital
    Consumption of fixed capital
    Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...

  • Cost segregation study
    Cost segregation study
    Under United States tax laws and accounting rules, cost segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes...

  • Depletion (accounting)
  • Deferred tax
    Deferred tax
    Deferred tax is an accounting concept , meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.- Temporary differences :Temporary differences are differences between...

  • Deferred financing costs

  • Expense
    Expense
    In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

  • John I. Beggs (1847-1925)
    John I. Beggs
    John Irvin Beggs was an American entrepreneur, industrialist and financier associated closely with the electric utility boom under Thomas Edison. He was also associated with Milwaukee, St. Louis, Missouri and other regional rail and interurban trolley systems...

     — The American businessman
    Businessperson
    A businessperson is someone involved in a particular undertaking of activities for the purpose of generating revenue from a combination of human, financial, or physical capital. An entrepreneur is an example of a business person...

     responsible for modern depreciation techniques
  • MACRS
    MACRS
    The Modified Accelerated Cost Recovery System is the current tax depreciation system in the United States. Under this system, the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal...

     tax depreciation rules in the U.S.
  • Revaluation of fixed assets
    Revaluation of fixed assets
    In finance, a revaluation of fixed assets is a technique that may be required to accurately describe the true value of the capital goods a business owns...

  • Writing down allowance
    Writing down allowance
    Businesses in the United Kingdom are entitled to claim capital allowances to reduce the Corporation or Income Tax payable on profits.Capital allowances are claimed on certain purchases or investments under the Capital Allowances Act 2001....



Additional reading

Accounting
  • Kieso, Donald E; Weygandt, Jerry J.; and Warfield, Terry D.: Intermediate Accounting, Chapter 11. ISBN 978-0-471-44896-9.
  • Financial Accounting Standards Board (U.S.) Accounting Standards Codification 360-10-35. Available for free browsing access with registration.
  • International Financial Reporting Standards
    International Financial Reporting Standards
    International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

      IAS 16


Tax
  • Canada Revenue Claiming capital cost allowance (CCA).
  • UK Business Link (a government site) Capital allowances: the basics.
  • UK HMRC Capital Allowances Manual and Help Sheet for employees.
  • U.S. Internal Revenue Service
    Internal Revenue Service
    The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

    Publication 946, How to Depreciate Property. Washington, DC: U.S. Government Printing Office.
  • IRS Rev. Proc. 87-56 and 87-55 (shown in Publication 946 as tables, as currently updated)
  • Willis, Eugene; Hoffman, William H. Jr., et al, South-Western Federal Taxation, chapter 8, published annually. 2009 edition included ISBN 973-0-324-66060-0 (student) and ISBN 978-0-324-66208-5 (instructor).
  • Pratt, James W.,; Kulsrud, William N., et al, Federal Taxation, chapter 9, updated periodically. 2010 edition ISBN 978-1424069866.
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