Depreciation

Depreciation is 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

1. Identify factors involved in determining depreciation process:

a. Determining depreciation base: The base established for depreciation is a
function of two factors: the original cost, and salvage or disposal value
b. Estimating service lives
c. Selecting a method of cost apportionment
2. Methods of depreciation:
a. Activity Method : assumes that depreciation is a function of use rather
than a function of time.
b. Straight-line : considers depreciation as a function of time rather than a
function of usage.
c. Decreasing-charge method : provide higher depreciation cost in earlier
years, and lower depreciation cost in the later periods. The justification of
this approach is that the asset is more productive in its earlier years.
3. Special depreciation methods:
a. Group and composite methods : The group method is frequently used
when the assets are fairly similar in nature and they have approximately
the same useful lives. The composite methods maybe used when the
assets are dissimiliar and dont have same useful live.
b. Hybrid and combination methods: these methods combine straight-line
and activity methods.
4. Impairment
The process to determine the impairment processes are as follows :
a. Review events and changes in circumstances for possible impairment
b. If the events and reviews suggest for impairment, determine if the sum of
the expected net future cash flow is less than the carrying amount of the
asset. If less measures the impairment loss.
c. Impairment loss is when the carrying amount exceeds than the fair value
of the asset.
5. Depletion
a. Establish the depletion base
b. Write-off resource cost
Factors in establishing depletion base :
1) Acquisition cost
2) Exploration cost
3) Development cost
4) Restoration cost
To write-off resources cost, company uses units-of-production method
to compute the depletion.
Thus, depletion is a function of the number of units withdrawn
during the period. To obtain a cost per unit of product, the total cost
of the natural
 resource less salvage value is divided by the number of units
estimated to be in the
resource deposit, to obtain a cost per unit of product. To compute
depletion, this cost per
unit is multiplied by the number of units withdrawn.

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