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21 Cards in this Set

  • Front
  • Back
the periodic transfer of cost to expense
2 kinds of depreciation
1. physical depreciation
2. functional depreciation
physical depreciation
from wear and tear while in use and from the action of the weather
functional depreciation
when a fixed asset is no longer able to provide services at the level for which it was intended
Depreciation expense factors
Initial Cost - Residual Value = Depreciable Cost
3 factors in accounting for depreciation
1. initial value
2. expected useful life
3. residual value (scrap value, salvage value, trade-in value)
3 methods used for depreciation
1. straight-line method
2. units-of-production
3. declining-balance
Straight-line method
provides for the same amount of depreciation expense for each year of the asset's useful life

(inital cost - residual value) / # of years
unit-of-product method
provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset

calculated by multiplying the unit depreciation by the number of units produced or used during the period
declining-balance method
provides for a declining periodic expense over the estimated useful life of the assets; to apply this method, the annual straight-line depreciation rate is doubled; aka accelerated depreciation method
book value
cost minus accumulated depreciation
MACRS (Modified Accelerated Cost Recoery System)
Internal Revenue Code for use by business in computing depreciation for tax purposes
Composite-Rate Method
Grouping and computing depreciations of assets with common traits (i.e. office equipment & store fixtures)
Capital expenditure
costs of acquiring fixed assets, adding to a fixed asset, improving a fixed assets, or extending a fixed asset's useful life
(affect depreciation expense of more than 1 period)
Revenue expenditure
costs that benefit only the current period or costs incurred for normal maintenance and repairs
(affect expenses of only the current period)
4 stages of costs incurred for fixed assets
1. preliminary
2. preacquisition
3. acquisition and construction
4. in-service
preliminary stage
*before* management believes acquiring a fixed asset is probable (feasibility studies, marketing studies, financial analyses etc.);
recorded as "revenue expenditures"
preacquisition stage
acquiring fixed asset has become probable, but not yet occurred
(surveys, zoning, engineering studies etc.);
treated as "capital expenditure"
acquisition or construction stage
acquisition has occurred or construction has begun;
capitalize in the "fixed asset" account or "construction in progress" account;
when fixed asset is ready for use, transfer the capitalized costs to related fixed asset account
in-service stage
fixed asset is complete and ready for use;
depreciation begins;
normal, recurring, or periodice repairs/maintenance charges recorded under "maintenance expense" for the period
replacing a component
2 steps:
(1) dibit book value to "Depreciation Expense," and credit to "Accumulated Depreciation"
(2) capitalize identifiable costs associated with the new component