Depreciation of Assets

Depreciation is the expenditure of the serviceability of a particular asset through the combined end product of wear and tear, aging utilization, and obsolescence.  Some of these factors tend to cause the asset to deteriorate physically and others refer to the loss of usefulness from other causes.  For example, the asset may become obsolete because it no longer is large enough for your company’s needs for example, it might be your first computer.  Your competitors may have acquired a more current computer or technology and you may have to replace yours in order to match their reduced cost of production, or their increased output.  Depreciation does not include if a product breaks or other unexpected losses.  These will need to go on the books as losses rather then depreciation.  Accounting for the depreciation of an item consists of making entries that recognize, with reasonable accuracy a dollar amount that should be assigned to each accounting period.  Every asset should have its own depreciable cost for each accounting period.  Depreciable cost can be calculated by taking the original cost minus the amount we expect to get for the asset when you salvage it.  If an asset costs $200 and we predict that we will use it for four years, and then sell it secondhand for $40, the depreciation boils down to $40 per year.  Assuming use of historical cost of a given asset we must have a record of the cost, we also must make an estimate as to how long the asset will be useful (which subtracted from the cost gives us the depreciable cost) and we must determine what the resale value will be at the end of the assets lifespan.  This is the information used to determine the most appropriate pattern to be followed when depreciating an asset.