Accounting & auditingLesson 1 of 1 in the course Depreciation and inventory

Depreciation: Cost Allocation, Methods, and Tax Treatment

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

Save course
Lesson progress
0 / 5

Your progress is kept in this browser only.Sign up to save it

Summary

Depreciation connects the cost of a long-term asset with the periods that benefit from its use. It matters because it affects reported expenses, profit, and the carrying amount of assets.

In everyday language, depreciation may mean that an asset loses value as it wears out, becomes obsolete, or is used. In accounting, depreciation primarily means allocating the depreciable cost of a tangible long-term asset over the periods in which the business expects to benefit from it. It is therefore a method of allocation, not a direct attempt to measure current market value.

All flashcards

What does accounting depreciation do?
It systematically allocates a tangible asset’s depreciable cost over the periods expected to benefit from its use.
What are the four main inputs to a depreciation calculation?
Asset cost, residual value, useful life, and allocation method.
Why is accumulated depreciation a contra account?
It offsets an asset’s historical cost when calculating its carrying amount.
How does depreciation differ from impairment?
Depreciation systematically allocates cost; impairment recognizes an unexpected decline in recoverable value.
What is a capital allowance?
A tax deduction for the cost of qualifying capital assets.

Quiz questions

  1. Why is depreciation added back to net income in the indirect cash-flow reconciliation?Answer: It reduced accounting profit but did not require a current cash payment.
  2. For a five-year useful life, what double-declining-balance rate results from doubling the straight-line rate?Answer: 40%.
  3. How does the sum-of-years’-digits method calculate depreciation for a period?Answer: It multiplies depreciable basis by remaining useful life divided by the sum of the year digits.
  4. How is the composite depreciation rate calculated?Answer: Annual depreciation divided by the group’s total historical cost.
  5. What does a tax averaging convention generally do?Answer: It assumes assets were placed in service at a standard point during a period.

Based on the Wikipedia article Depreciation, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.

More in Accounting & auditing

All Accounting & auditing lessons
Accounting & auditingIncome Statement Analysis: From Sales to EBITDA5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingOperating Efficiency Ratios: Receivables, Assets, and Inventory5 flashcards · 5 quiz questions · 4 gamesPlay free →