For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.
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Harold Averkamp, CPA, MBA
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If you have difficulty answering the following questions, learn more about this topic by reading our Depreciation (Explanation).
Depreciation Expense shown on a company's income statement must be the same amount as the depreciation expense on the company's income tax return.
The amount on the income statement should be based on the accountant's matching principle. The amount on the income tax return should be based upon income tax regulations.
The amount on the income statement should be based on the accountant's matching principle. The amount on the income tax return should be based upon income tax regulations.
The purpose of depreciation is to have the balance sheet report the current value of an asset.The purpose of depreciation is to match the cost of the asset to revenues derived from using the asset or to the periods benefiting from the asset. The amount not yet depreciated (or not yet matched to revenues or periods) does not indicate the current value. For example, a computer might be depreciated over five years with equal amounts each year; however, the computer's value after one year may be only half of its cost.
The purpose of depreciation is to match the cost of the asset to revenues derived from using the asset or to the periods benefiting from the asset. The amount not yet depreciated (or not yet matched to revenues or periods) does not indicate the current value. For example, a computer might be depreciated over five years with equal amounts each year; however, the computer's value after one year may be only half of its cost.
Depreciation Expense reflects an allocation of an asset's original cost rather than an allocation based on the economic value that is being consumed.
This is true because of the cost principle and the matching principle. The company is trying to match the cost of the asset to the revenues derived from the asset or to the periods benefiting from the asset.
Depreciation is an ALLOCATION technique, not a VALUATION technique. An asset's useful life is the same as its physical life?An asset (such as a computer) may have a very long physical life. However, due to rapid technological advances the asset's useful life may be a small fraction of its physical life.
An asset (such as a computer) may have a very long physical life. However, due to rapid technological advances the asset's useful life may be a small fraction of its physical life.
One company might depreciate a new computer over three years while another company might depreciate the same model computer over five years. and both companies are right.
The accountant's matching principle requires that the cost be allocated over the USEFUL life. An accountant might use a useful life of five years for her new computer, since the accounting software does not change significantly. A graphic artist might find that the software for that sector is changing dramatically and will require a more technologically advanced computer in two years. For financial statement purposes the graphic artist will correctly use a USEFUL life of two years while the accountant will correctly use a USEFUL life of five years. (Income tax depreciation is not covered in the AccountingCoach.com materials.)
The accountant's matching principle requires that the cost be allocated over the USEFUL life. An accountant might use a useful life of five years for her new computer, since the accounting software does not change significantly. A graphic artist might find that the software for that sector is changing dramatically and will require a more technologically advanced computer in two years. For financial statement purposes the graphic artist will correctly use a USEFUL life of two years while the accountant will correctly use a USEFUL life of five years. (Income tax depreciation is not covered in the AccountingCoach.com materials.)
Depreciation Expense is shown on the income statement in order to achieve accounting's matching principle.
The goal is to match the cost of an asset to the revenues derived from the use of the asset or to match the cost to the accounting periods benefiting from the asset.
The goal is to match the cost of an asset to the revenues derived from the use of the asset or to match the cost to the accounting periods benefiting from the asset.
Accumulated Depreciation will appear as a deduction within the section of the balance sheet labeled as Property, Plant and Equipment.
Accumulated Depreciation is a contra asset account (its balance is a credit balance even though assets usually have debit balances) shown in the section of the balance sheet section Property, Plant and Equipment. Because its balance is a credit, it is a deduction from the other assets which have debit balances.
Accumulated Depreciation is a contra asset account (its balance is a credit balance even though assets usually have debit balances) shown in the section of the balance sheet section Property, Plant and Equipment. Because its balance is a credit, it is a deduction from the other assets which have debit balances.
If a company continues to use equipment past the useful life that was assumed in determining the depreciation, there will be no Depreciation Expense in those additional years.
After the original cost has been depreciated, the depreciation associated with the original cost stops. If the asset is used for five additional years, there will be no Depreciation Expense in those five years. (However, if the company spends additional amounts to extend the asset's life, the additional amounts should be depreciated in those years.)
After the original cost has been depreciated, the depreciation associated with the original cost stops. If the asset is used for five additional years, there will be no Depreciation Expense in those five years. (However, if the company spends additional amounts to extend the asset's life, the additional amounts should be depreciated in those years.)
A company may depreciate equipment over 10 years on a straight-line basis for its financial statements, but might use an accelerated method of depreciation over a shorter time period on its income tax return?
Depreciation Expense for the financial statements is based on the accountant's matching principle. The depreciation on the income tax return is subject to income tax regulations. (The tax regulations do allow for tax depreciation to be accelerated and even immediate expensing under certain conditions.) Hence, it is very likely (and proper) that the financial statement and income tax return will differ as far as depreciation expense.
Depreciation Expense for the financial statements is based on the accountant's matching principle. The depreciation on the income tax return is subject to income tax regulations. (The tax regulations do allow for tax depreciation to be accelerated and even immediate expensing under certain conditions.) Hence, it is very likely (and proper) that the financial statement and income tax return will differ as far as depreciation expense.
Depreciation Expense is sometimes referred to as a noncash expense.The entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation. Cash is not involved. The depreciation entry reduces net income, but it does not reduce the company's Cash. Hence, some refer to depreciation as a noncash expense.
The entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation. Cash is not involved. The depreciation entry reduces net income, but it does not reduce the company's Cash. Hence, some refer to depreciation as a noncash expense.
Both Land and Land Improvements will generally be depreciated.Land is generally not depreciated. It is assumed that the useful life of land will be indefinite. Land Improvements are depreciated, because these constructed assets are assumed to have a limited life. Examples of Land Improvements would be the parking lot and the lighting in the parking lot.
Land is generally not depreciated. It is assumed that the useful life of land will be indefinite. Land Improvements are depreciated, because these constructed assets are assumed to have a limited life. Examples of Land Improvements would be the parking lot and the lighting in the parking lot.
Depreciation Expense shown on the financial statements is a precise amount that is continuously refined.
Depreciation Expense is based on an estimated useful life and an estimated salvage value. The Depreciation Expense for each year is often determined early in the asset's life and is not changed routinely—although revisions are permitted.
Depreciation Expense is based on an estimated useful life and an estimated salvage value. The Depreciation Expense for each year is often determined early in the asset's life and is not changed routinely—although revisions are permitted.
Over the life of an asset subject to depreciation, the total Depreciation Expense using the accelerated method will be more than the total Depreciation Expense using the straight-line method.
Over the life of an asset, the depreciation in total will be the same. What is different is the timing of the depreciation.
While the timing of the depreciation will differ between methods, the total amount of depreciation over the life of the asset will be the same.
Which of the following depreciation methods is NOT an accelerated method?The double-declining-balance method is a form of accelerated depreciation. This means the depreciation is faster in the early years of the asset's life and then slower in later years when compared to the straight-line method.
The double-declining-balance method and the sum-of-the-years'-digits method are forms of accelerated depreciation.
The sum-of-the-years'-digits method is a form of accelerated depreciation. This means the depreciation is faster in the early years of the asset's life and then slower in later years when compared to the straight-line method.
The book value of an asset is defined as __________.cost minus salvage value
There is no account entitled Salvage in the general ledger. As a result there is no salvage amount in the books.
cost minus accumulated depreciation
Book value is cost minus the accumulated depreciation. (Sometimes book value is referred to as carrying value.) Book value is not an indication of the fair market value of an asset.
cost minus salvage value minus accumulated depreciation
There is no account entitled Salvage in the general ledger. As a result there is no salvage amount in the books.
estimated fair market value
When a company purchases real estate consisting of a 10-acre parcel of land and a building, the company will depreciate the entire cost over the useful life of the building.
Land is not depreciated. Part of the purchase price must be allocated (assigned) to Land. The remaining cost is assigned to the Building and that amount is depreciated.
Land is not depreciated The book value of an asset indicates the asset's fair market value at that time.The book value represents the cost of the asset minus the Accumulated Depreciation. The fair market value of the asset might be more or less than the book value.
The book value represents the cost of the asset minus the Accumulated Depreciation. The fair market value of the asset might be more or less than the book value.
A company purchases equipment for $30,000 on July 1, 2023. It estimates that the equipment will have a salvage value of $2,000 and its useful life will be 7 years. Assuming that the company's accounting year ends on December 31 of each year, what will be the Depreciation Expense for the years 2023 and 2024 assuming straight-line depreciation?
Year 2023: $
__________$2,000
Calculated as follows: Cost of $30,000 minus Estimated Salvage Value of $2,000 = Amount to Be Depreciated = $28,000 divided by 7 years = $4,000 for a full year. In 2023 the asset was in service for six months, so the depreciation expense for 2023 is $2,000 (6/12 of $4,000).
$4,000
Calculated as follows: Cost of $30,000 minus Estimated Salvage Value of $2,000 = Amount to Be Depreciated = $28,000 divided by 7 years = $4,000 for a full year.
On January 1, 2019 an asset was acquired for $30,000. Its useful life was expected to be 10 years and the salvage value is expected to be $0. After four years of use, the company realized the asset would be useful for only three more years. (In other words, the total useful life of the asset will be seven years instead of the original 10 years.) The company uses the straight-line method of depreciation. The Depreciation Expense in each of the years 2023, 2024, and 2025 will be $ __________ $6,000
Calculated as follows: Cost of $30,000 minus Estimated Salvage Value of $0 = Amount to Be Depreciated = $30,000 divided by 10 years = $3,000 per year for the years 2019, 2020, 2021, and 2022.
After 4 years the Book Value is $18,000 ($30,000 minus $12,000). The Book Value of $18,000 will have to be depreciated over the remaining life of 3 years = $6,000 per year.
If a company revises the estimated useful life of one of its assets being depreciated, the company will need to reissue its earlier financial statements as the earlier depreciation was incorrect.
A change in an estimate affects the current period and future periods. Since it is not an error, the financial statements issued in previous periods are considered proper based on the information at that time and will not need to be revised.
A change in an estimate affects the current period and future periods. Since it is not an error, the financial statements issued in previous periods are considered proper based on the information at that time and will not need to be revised.
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