Most individuals at one time or
another purchase and trade in an automobile. It
discussion with the automobile dealer, depreciation
is a consideration on two points. First how much has
the old car depreciated? That is, what is the trade
in value? Second, how fast will the new car
depreciate? That is what will its trade in value be
several years in the future? In both cases
depreciation is thought of as a loss in value.
To accountants, however,
depreciation is not a matter of valuation, but a
means of cost allocation. Assets are not depreciated
on the basis of a decline in their fair market
value, but on the basis of systematic charges to
Depreciation is defined as 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 asset.
This approach is employed because
the value of the asset may fluctuate between the
time the asset is purchased and the time it is sold
or junked. Attempts to measure these interim value
changes have not been successful because values are
difficult to measure objectively. Therefore, the
asset's cost is charged to depreciation expense over
its estimated life, making no attempts to value the
asset at fair value between acquisition and
disposition. The cost allocation approach is used
because a matching of costs with revenues occurs and
because fluctuations in fair value are tenuous and
difficult to measure.
When long-lived assets are written
off, the depreciation is most often used to indicate
that tangible plant assets have declined in value.
Where natural resources such as
timber, gravel, oil, and coal are involved, the term
depletion is employed.
The expiration of intangible assets,
such as patents or good will, is called