11 Depreciation LEARNING OBJECTIVES 1 Explain the concept

11 Depreciation LEARNING OBJECTIVES 1. Explain the concept of depreciation. 2. Identify the factors involved in the depreciation process. 3. Compare activity, straight-line, and diminishing-charge methods of depreciation. 11 -1

DEPRECIATION—METHOD OF COST ALLOCATION Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Allocating costs of long-lived assets: 11 -2 u Fixed assets = Depreciation expense u Intangibles = Amortization expense u Mineral resources = Depletion expense LO 1

DEPRECIATION—COST ALLOCATION Factors Involved in the Depreciation Process Three basic questions: 1. What depreciable base is to be used? 2. What is the asset’s useful life? 3. What method of cost apportionment is best? 11 -3 LO 2

Factors Involved in Depreciation Process Estimation of Service Lives u Service life often differs from physical life. u Companies retire assets for two reasons: 1. Physical factors (casualty or expiration of physical life). 2. Economic factors (inadequacy, supersession, and obsolescence). 11 -4 LO 2

Factors Involved in Depreciation Process Depreciable Base for the Asset ILLUSTRATION 11 -1 Computation of Depreciation Base 11 -5 LO 2