Depreciation Expense is major concept accountants should keep in mind when working with companies and businesses that own plant assets.
Plant assets include not just plants but also property and equipment that are tangible in nature. Actively used in operations and are expected to benefit in future periods of time. The Financial Accounting Fundamentals textbook states that the definition of depreciation. It is the process of computing expense from allocating the cost of plant and equipment over their expected useful lives. When calculating depreciation one should notice that actual land is not a depreciable asset. Only land improvements are. Building costs include the purchase or construction price plus taxes and brokerage, title, attorney fees. When it comes to equipment and machinery total cost of plant asset includes the purchase price, taxes, cost of installing. And assembling and testing the asset as well as transportation charges and insurance while in transit.
Depreciation on used assets:
Deprecation will affect assets by decreasing the value and allocating the costs to the period in which they were use. For financial purposes depreciation must account for because assets will decrease in value from use and age. Expense of an asset is allocate in many periods to match revenue earn from asset to the expense of asset. If expense of an asset was recognize in total when the asset was acquire the income statement would be off. It is showing very high expenses and a low net-income. Things need to be establish to depreciate asset depreciable base, useful life, and method of depreciation that shall be used. The depreciable base is cost of the asset less the salvage value. A salvage value is estimate amount the company will receive when the asset is sold or remove from service. Depreciable base is total amount of depreciation that will be expense.
How depreciation is use?
The useful life of the asset must determine to know how many periods of depreciation will be use. Estimating an asset’s useful life can be difficult to a firm because of many unknown variables. If production companies have increase in demand they will need to replace their current machines with faster more efficient machines. Technological advances can make current assets obsolete and inefficient to operate. After depreciable base and useful life of asset have been established firm choose appropriate method of depreciation for given asset. For all depreciation methods depreciation expense for a period is debit and accumulate depreciation is credit. The depreciation expense is an expense account going on the income statement. Accumulated depreciation is a contra-asset account reducing the book value of the asset found on balance sheet. Book value of an asset is for accounting purposes only and is not to be confuse with fair value.
The fair value or market value is what the asset will sell for in the current market. Usually the book value is on the conservative side being lower than fair value. You can check all methods online without any issue.