econ ch3 Flashcards
is the decrease in the value of physical property with the passage of time
depreciation
purpose of depreciation
a. toprovidefortherecoveryofthecapitalwhichhasbeeninvested
in physical property
b. to enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of the property
Types of Depreciation
- physical depreciation
- functional depreciation
deterioration caused by various chemical and
mechanical factors on the materials composing a property)
physical depreciation
deterioration caused by the decrease in demand for the equipment for which it was designed
functional depreciation
Requirements of a Depreciation Method
a. Itshouldbesimple
b. Itshouldrecovercapital
c. The book value will be reasonably close to the market value at any time d. MethodsshouldbeacceptedbytheBIR
methods of computing depreciation
1.straight line method
2.sinking fund method
3. declining balance method
4. double declining balance
5. sum of the years digits
6. the service output method
assumes that the loss in value is directly proportional to the life span of the property)
annual depreciation cost
straight line method
assumes that a sinking fund is established in which funds will accumulate for replacement
sinking fund method
assumes that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year)
declining balance method
same as declining balance except that the rate of depreciation, k, is replaced by 2/n
double declining balance
assumes that the total depreciation that has taken place directly proportional to the quantity of the output of the property up to that time
the service output method
is an annual charge that is made for the maintenance of investment in wasting assets such as mines, oil and gas well
depletion
