Demystifying Depreciation of Long-Term Assets

🏦Long-term assets are recorded at initial cost on the balance sheet and then expensed over time through depreciation.

📉Depreciation represents the decline in usefulness, functionality, and value of the asset.

💰Depreciation transfers the cost of the asset to an expense account over its useful life.

⏳Properly depreciating an asset requires information about the initial cost, expected useful life, and residual value.

📝There are three common depreciation methods: straight-line, units of activity, and double declining balance.

What is the purpose of depreciation?

—Depreciation is used to allocate the cost of a long-term asset over its useful life and match it with the revenue it generates.

Why is residual value important in depreciation?

—Residual value is the anticipated value of an asset at the end of its useful life and helps determine the depreciable cost.

What is the straight-line depreciation method?

—Straight-line depreciation provides a constant amount of depreciation expense each year by dividing the depreciable cost by the expected useful life.

How is the units of activity method used?

—The units of activity method bases depreciation on how much the asset is expected to produce rather than purely on the number of years in service.

What is the double declining balance method?

—The double declining balance method is an accelerated depreciation method that provides higher depreciation expense in the early years of an asset's life.

00:08Long-term assets, known as fixed assets, are initially recorded at cost on the balance sheet.

00:19The entire cost of a fixed asset is treated as an asset and recorded on the balance sheet.

01:32Depreciation represents the decline in the usefulness, functionality, and value of a fixed asset.

02:46Properly depreciating an asset requires information about the initial cost, expected useful life, and residual value.

02:59The straight-line depreciation method provides a constant amount of depreciation expense over the life of the asset.

03:23The units of activity method bases depreciation on how much the asset is expected to produce.

04:35The double declining balance method is an accelerated depreciation method that provides higher depreciation expense in the early years of an asset's life.

06:10The book value of an asset is used in the double declining balance method.