Depreciation 101

Which method of depreciation calculates the same amount of expense for each year of the asset lifespan?

Depreciation is the determination of the cost incurred in the ________ of a particular tangible asset.

What is the main reason for the depreciation of physical assets?

The units of production method of depreciation is based on the total number of ________ generated by utilizing the asset.

What is the formula for calculating depreciation using the straight-line method?

Depreciation Methods

Straight-line method calculates the same expense amount annually over the asset's lifespan.
This method simplifies budgeting and forecasting as the expense is consistent each year.

Definition of Depreciation

Depreciation determines the cost incurred in the utilization of a tangible asset.
It reflects the wear and tear or reduction in value over time due to usage and aging.

Reasons for Depreciation

The primary reason for asset depreciation is the allocation of the asset's cost over its useful life.
Depreciation accounts for factors such as obsolescence, physical deterioration, and market demand changes.

Units of Production Method

The units of production method calculates depreciation based on the total number of units produced using the asset.
This method aligns the expense with actual asset usage, making it suitable for production equipment.

Straight-Line Depreciation Formula

The formula for calculating straight-line depreciation:
- (Cost of asset - Salvage value) / Useful life of the asset
This formula aids in determining annual depreciation expense, providing a clear view of asset value decrease over time.

Test your knowledge on depreciation with this quiz! Learn about the definition, types, formula, and methods of depreciation in accounting. Find out the reasons for depreciation and expand your understanding of this important concept.