Deprection Flashcards
What is the definition of deprecation?
Deprecation is the systematic allocation of the historical cost of an asset, less its residual value, over its useful life.
Why is depreciation an expense?
There is a DEPLETION of an asset as it has been used to create future economic benefit.
There is a decrease in equity due to a decrease in profit of the business.
This transaction has not caused equity to decreases due to drawings of the owner.
Why is deprecation a limitation of the financial statements?
Deprecation is only an estimate. It could be miscalculated because we can only estimate residual value (selling price) and/or its useful life (years). The only thing certain is its historical cost.
Does deprecation calculate the market value of an asset?
NO, its an estimation of how much of an asset has been used up or worn out over its useful life when producing income for the business.
