Accounting

Depreciation, Impairments, and Depletion

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 assets. Allocating costs of long-term assets: Fixed assets = Depreciation expense, Intangibles = Amortization expense, Natural resources = Depletion expense. Depreciation is an allowance or provision made in the financial records of a business or association for "wear and tear" and "technical obsolescence "on plant and equipment. The idea of depreciation is to spread the cost of that capital asset over the period of its "useful life to the entity" that currently owns it. If the full cost of the asset were to be born in the year that it was purchased, then that year's expenditure would be unfairly penalized while expenditure during the remaining years, which were still receiving the benefit from the asset, would not be affected. Depreciation relates to capital assets shown on a Balance Sheet as Non-Current Assets. These assets are purchased to be used by the association and are generally not for resale. e.g. a filing cabinet, a photocopier, a microfiche reader, a computer, office chairs, tables. Most of these would come under the heading of Office Furniture and Equipment. However each item of furniture and equipment may not last as long as another. It may wear out, prove inadequate or become technically obsolete. Therefore when considering the question of depreciation, the "useful life" to the association of each depreciable asset should be estimated and the "depreciable amount" ( i. the historical cost less the net amount expected to be recovered on the disposal of that asset at the end of its useful life based on today's values and not some time in the future) should be calculated. A computer may last six to ten years but it is highly probable that the maximum "useful life" for depreciation purposes might be regarded as three to five years...