From the course: Accounting Foundations: Asset Impairment
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Straight-line depreciation and book value
From the course: Accounting Foundations: Asset Impairment
Straight-line depreciation and book value
- Depreciation is the process of systematically allocating the cost of a long-term asset over the years that the asset is in service. The most common method for computing depreciation, for financial reporting purposes, is the straight-line method. The straight-line method results in the same amount of depreciation expense for each year. Now, all assets are purchased because they represent future benefits. If I pay my rent in advance for the next 12 months, then I'm buying 12 months of future benefits. And standard accounting practice will assign that rental cost evenly to those 12 future months. Buying a building or a machine is the same thing. You are buying future benefits, and the cost of those future benefits, the purchase cost of the building or machine, should be assigned to those future periods. Here is how straight-line depreciation computations work. Let's say that we buy a machine for $10,000 that we expect to use…
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