Depreciation Case
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Week 2 Reflection Summary
In week 2 we learned about the different types of depreciation. Depreciation is the process of allocating to expense the cost of a plant asset over its useful life. There are different methods to do this. I will explain the three methods. Land improvements, buildings and equipment are known as depreciable assets. The usefulness of each asset will decline over a period of time. Land is not a depreciable asset because its revenue producing ability remains intact over time.
The three factors that affect the computation of depreciation are cost, useful life, and salvage value. Depreciation expense is recorded on the income statement. The three methods of depreciation are straight-line, units-of-activity, and declining balance. With the straight-line method, cost minus the salvage value equals the depreciable cost. The depreciable cost is then divided by the useful life in years to get the annual depreciation expense. By taking 100% and dividing it by the number of years, we can find out the annual rate of depreciation.
The depreciation expense is the same each year using the straight-line method. With the units-of -activity method, the total units of production are used to determine the useful life. Manufacturing companies would most likely use this method of depreciation. It can be used for delivery equipment and also airplanes. The depreciable cost is divided by the total units of activity. This could be miles. The result is the depreciation cost per unit. This figure is then multiplied by the units of activity during the year. Annual depreciation expense is the figure we arrive at.
The third method is the declining-balance method. With this method, a decreasing annual depreciation expense is produced. Companies compute the annual depreciation by multiplying the book value at the beginning of the year by the declining-balance depreciation rate. The book value is the difference between the cost and the accumulated depreciation. There is also double the straight- line rate. This is called the double-declining balance method. In this method, the depreciation rate percentage is multiplied twice and multiplied by the straight-line rate. This method is considered an accelerated-depreciation method.
I struggled with depreciation and accumulated depreciation this week. The math is not difficult. What was difficult for me was where to properly credit and debit these items. One thing I learned is that assets have a debit balance and when they are debited they increase and when they are credited they decrease. Learning the proper accounts to credit and debit and what statements these accounts belong to has been my greatest difficulty. It will take practice for me to become efficient with these items.