Question

Describe in your own words the purpose of Depreciation, Amortization and Depletion. Also distinguish between straight-line, units of production and double-declining depreciation.

Answer 1

The Purpose of Depreciation is to charge to expense a portion of the asset that relates to revenue generated by the asset. This term is also known as Matching Principle. It Accumulates Fund to replace the asset in near future. Depreciation is Generally charged on Tangible Assets.

The Purpose of Amortization is to spread an Intangible Asset Cost Over the Assets Useful Life.

The Purpose of Depletion is to calculate and evenly account the cost of extracting natural resources such as timber, coal, oil etc.

Straight LIne- The Straight Line Method of Depreciation consisting of depreciating the value of the asset over the cost of its useful life. This is the Easiest and most Commonly used method of depreciation

Double Declining  Method- The Double Declining Method is accelerated depreciation method that counts twice as much of asset book value each year as an expense compared to straight-line depreciation. This Method is useful to the industry where initial recognization of depreciation to be done at the high rate.

Unit of Production Method: Under this method of production of depreciation, depreciation is charged according to the actual usage of the asset. In Unit of Production Method, higher depreciation is charged when there is higher activity and less is charged when there is lower. Zero Depreciation is charged when the asset is idle.