Depreciation In General

Depreciation is the allowance based on a law-defined "reasonable" reduction in the value of an asset based on exhaustion, wear and tear, and/or obsolescence over the time of ownership. It can also be described as an accounting concept used to track the aforementioned ideas of reduction, and is used primarily to reduce the taxable portion of a company's income. Property that is depreciable is an asset that is used for business, has a normal useful period exceeding one year, and exhibits decay or loses value from use. An asset that does not meet these qualifications is not depreciable, and is treated as an expense in the year the asset's cost is acquired [1].

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Why Depreciate? Why is it Important?

  • It's the law to depreciate assets.
  • Depreciation helps lead to good decision making

What to Depreciate?

  • Property used for business purposes to produce an income.
  • Assets with a determinable life longer than a year.
  • The item must decay, get used up, wear away, or become less valuable to the owner.

Depreciation Rules:

  • Almost all tangible property can be depreciated.
  • Personal land is not depreciated
  • Don't mix business and personal
  • Do not depreciate
    • Factory inventory
    • Leased property
    • Equipment used to make capital improvements

What Do You Need to Know to Depreciate?

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In order to calculate depreciation, we must know the following:

  • Cost basis: all costs associated with simply getting an asset up and running.
  • Service Date: this is the date that the asset is available for use.
    • Sometimes we pretend that things were purchased in the past so we get more depreciation.
  • Asset lifetime:
    • The IRS has a list of how long things last. Sometimes the life is different for agricultural purposes.
  • Asset salvage value.
  • Method of Depreciation (e.g., straight line depreciation, declining balance method, MACRS, etc…)

Other Resources

http://en.wikipedia.org/wiki/Depreciation

Sample Questions

Bibliography
1. 2009 U.S. Master Depreciation Guide. Chicago: CCH Editiorial Staff Publication, 2008. Print.
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