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Basic Concepts

Depreciation is a method of accounting for capital expenditures over time by expensing the cost. There are two main reasons to record depreciation: for personal financial bookkeeping to track net worth, and for business financial statements used for tax reporting. The method is the same for both, but the goals differ. Key terminology includes accumulated depreciation, book depreciation, fair market value, net book value, original cost, salvage value, and tax depreciation.

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33 views

Basic Concepts

Depreciation is a method of accounting for capital expenditures over time by expensing the cost. There are two main reasons to record depreciation: for personal financial bookkeeping to track net worth, and for business financial statements used for tax reporting. The method is the same for both, but the goals differ. Key terminology includes accumulated depreciation, book depreciation, fair market value, net book value, original cost, salvage value, and tax depreciation.

Uploaded by

ashwini
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Basic Concepts - Depreciation

Depreciation is the accounting method for expensing capital purchases over time. There are two reasons that you may want to record depreciation; you are doing bookkeeping for your own personal finances and would like to keep track of your net worth, or you are doing bookkeeping for a small busines and need to produce a financial statement from which you will prepare your tax return. The method of recording depreciation is the same in either case. but the end goal is different. This section will discuss the differences between the two. But first, some terminology.

Accumulated depreciation - the accumulated total of book depreciation taken over the life of the asset. This is accumulated in the depreciation account in the asset section. Book depreciation - this is the amount of depreciation that you record in your financial statements per accounting period. Fair market value - the amount for which an asset could be sold at a given time. Net book value - this is the difference between the original cost and the depreciation taken to date. Original cost - this is the amount that the asset cost you to purchase. It includes any cost to get the asset into a condition in which you can use it. For example - shipping, installation costs, special training. Salvage value - this is the value that you estimate the asset can be sold for at the end of its useful life (to you). Tax depreciation - this is the amount of depreciation that you take for income tax purposes. Planned Depreciation -

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