6. Depreciation and its role in the renewal of fixed capital. Depreciation methods.

Амортизация, ее исчисление и роль в обновлении основного капитала. Методыначисленияамортизации.

Depreciation. Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

For accounting purposes, depreciation indicates how much of an asset's value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.

Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the oil well.

Methods of depreciation:

Straight line depreciation method charges cost evenly throughout the useful life of a fixed asset. This depreciation method is appropriate where economic benefits from an asset are expected to be realized evenly over its useful life. Straight line method is also convenient to use where no reliable estimate can be made regarding the pattern of economic benefits expected to be derived over an asset's useful life.

Reducing Balance Depreciation Method. Depreciation expense decreases at a constant rate as the life of an asset progresses. Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset. The amount of depreciation reduces as the life of the asset progresses. Depreciation under reducing balance method may be calculated as follows:

Depreciation per annum = (Net Book Value - Residual Value) x Rate%

Sum of the years' digits. Depreciation charge declines by a constant amount as the life of the asset progresses. This method involves calculating depreciation based on the sum of the number of years in an asset's useful life.

Units of Production Depreciation Method. Depreciation charge varies each period in proportion to the change in level of activity. It calculates depreciation on the basis of expected output or usage. For example, a machine may be depreciated on the basis of output produced during a period in proportion to its total expected production capacity. Therefore, useful life of an asset under Units of Production Method is stated in terms of production output or usage rather than years of service. Depreciation per annum = (Cost - Residual Value) / Useful Life