Question

Cost recovery is the systematic allocation of cost to an expense. Discuss the three types of cost recovery and the related assets they apply to.

Answer 1

Cost recovery is a systematic allocation of cost to an expense.

It refers to deduction of portion of cost of asset used in the business or profession for generation of revenue.

There are three types of cost recovery:-

1. Depreciation:-

Depreciation refers to gradual reduction in the value of asset over its useful life.

Depreciation method is used with respect to tangible fixed assets like land and buildings, furnitures and plant and machinery etc.

Depreciation can be calculated using either straight line method or written down value method.

2. Amortization:-

It refers to writting off of the value of intangibles like good will, patents, trade marks etc over its useful life.

There is a rebuttable presumption that useful life of intangibles cannot exceed 10 years.

3. Depletion:-

Depletion is used for writting off the value of natural resources like mines.
It is recovered when the natural resources are extracted and sold.

Cost method and percentage method are the 2 methods to determine depletion allowance.