Depreciation of Fixed Assets
Depreciation of fixed assets refers to the decrease in value of fixed assets during their use. Fixed assets gradually depreciate over time, use, and wear and tear, and depreciation is the measure and recording of this decrease in value. Depreciation of fixed assets is usually calculated on an annual or accounting period basis to reflect the consumption of economic benefits of fixed assets during their use.
Fixed Asset Depreciation
Definition
Fixed asset depreciation refers to the reduction in value of fixed assets over time due to usage and wear and tear. This depreciation is measured and recorded to reflect the consumption of economic benefits of the fixed assets during their use. Depreciation is usually calculated annually or for each accounting period.
Origin
The concept of fixed asset depreciation dates back to the Industrial Revolution when businesses began to use machinery on a large scale and realized that these assets would depreciate over time. To accurately reflect the financial status of a business, depreciation methods were introduced into accounting practices. By the early 20th century, with the development of accounting standards, fixed asset depreciation became an essential part of financial statements.
Categories and Characteristics
There are several methods of fixed asset depreciation:
- Straight-Line Method: The same amount of depreciation is charged each year. It is simple to calculate and suitable for assets whose value decreases evenly over time.
- Double Declining Balance Method: Higher depreciation is charged in the earlier years and lower in the later years, suitable for assets with higher initial usage intensity.
- Sum-of-the-Years'-Digits Method: Depreciation decreases over time, suitable for assets with a shorter lifespan and higher initial usage intensity.
- Units of Production Method: Depreciation is based on actual usage, suitable for assets with uneven usage.
Specific Cases
Case 1: A company purchases a machine worth 100,000 yuan with an expected lifespan of 10 years and a residual value of 10,000 yuan. Using the straight-line method, the annual depreciation amount is (100,000 - 10,000) / 10 = 9,000 yuan.
Case 2: A company purchases a vehicle worth 200,000 yuan with an expected lifespan of 5 years and a residual value of 20,000 yuan. Using the double declining balance method, the first year's depreciation amount is 200,000 * 2 / 5 = 80,000 yuan, and the second year's depreciation amount is (200,000 - 80,000) * 2 / 5 = 48,000 yuan.
Common Questions
Question 1: Why is fixed asset depreciation necessary?
Answer: Fixed asset depreciation accurately reflects the actual value of assets, helps businesses allocate costs reasonably, and prevents inflated profits.
Question 2: Can the depreciation method be changed arbitrarily?
Answer: Once a depreciation method is determined, it should not be changed arbitrarily during the asset's lifespan unless there is a reasonable justification and approval.
