Depreciation is the method used by companies to the allocate cost of an asset over a time span the asset must be used to earn revenue for the business. The idea to match the cost of the asset over the period And so it’s being used up to generate revenue is dictated by the matching concept. This does not mean the market value of the asset or can depreciation been seen as a loss or damage to the value of the asset. In this sense the account is called a contra asset. Anyway, a truck that costs $ 10000 to buy must be recorded as an asset and after all the depreciation cost of the asset will be recorded in the accumulated depreciation account under the general asset account.
In financial accounting, depreciation is just a method of allocating the cost of the assets over its expected useful life.
The difference between the cost of the asset and the total of the accumulated depreciation is the net book value of the asset.
Depreciation is usually maintained in an account called accumulated depreciation and is used to reduce the value of the asset. Accumulated depreciation account does not involve the cash account of the assets. Usually, depreciation tends to be a large expense on the financial statements of companies. Ok, and now one of the most important parts. The ways of applying depreciation is a regular practice that covered by the Generally Accepted Accounting practices standards. It directly impacts the expenses thereby impacting the income statement and the earned income the company presents. It’s a well the assumptions in depreciation are around the methods of calculation the companies choose for depreciation calculation and the parameters involved in the calculation. For instance, the cost of an asset could be the delivered and installed cost of the asset.
It could be the cost involved in getting the asset to be productive for the company.
The salvage value is the value the company expects to realize when an asset is sold after the estimated useful life of the asset.
It is similar to the tax deduction people get on the tax returns when they donate a car, the salvage amount is determined as the current market price of the car. Salvage value is the market value the asset is supposed to fetch after the useful life. It also depends on the industry the asset is or the percentage of customization the asset has gone through and if it would have any demand on the market. Of course, the salvage amount is sometimes tricky to calculate because of market conditions and demand of the product.
Software the company buys. Sometimes the asset could also become obsolete within the period of useful life making it very difficult to calculate the salvage value. Both the salvage value and useful life of an asset directly impact the depreciation calculation of an asset. Accountants must get these values as accurate as possible by consulting with the engineering department of the company. Now let me tell you something. An automobile usually depreciates faster initially and hence it makes sense choosing a faster depreciation method. However, the method of calculation usually depends on the asset type. Companies are free to choose the method of calculation for an asset. Although, the method of calculation directly impacts the net book value of the asset and hence the earnings. If you are a moderator please see our troubleshooting guide. Then again, we were unable to load Disqus. Ragini Soni Thanks for sharing excellent information!