Many fixed assets have extended but limited lives. Because these assets help generate revenues throughout their useful lives, their costs must be reflected as expenses during that time. Depreciation is the process of allocating the cost of a fixed asset as an expense in the years when the asset helps generate revenue. Depreciation is an application of the matching principle. Because land has an unlimited life, it is not depreciated.
GAAP permits the use of any depreciation method that is systematic and rational. Methods differ in the timing of expense recognition during an asset’s life, yet over the course of an asset’s entire life, total depreciation expense will be the same under all methods. Three commonly used methods are illustrated here: straight-line, sum-of-theyears’ digits, and declining-balance.
Depreciation Methods and Topics
- Straight-Line Method (Depreciation Methods)
- Sum-of-the-Years’-Digits Method (Depreciation Methods)
- Declining-Balance (DB) Methods (Depreciation Methods)
- Tax Depreciation
- Selection of Depreciation Method
- Misconceptions About Depreciation