Depreciation Accounting

Allocating the cost of an Asset over its estimated Useful Life.
Example: Collins buys a warehouse for $550,000. Of the price, $50,000 is for land, which is not subject to depreciation. Of the remaining $500,000, she claims accounting depreciation of $10,000 per year over a 50-year Depreciable Life despite the fact that the property is expected to increase in value because of the location of the land.

Amortization of fixed assets, such as plant and equipment, in order to allocate the cost over its depreciable life. It is a process of cost allocation and not valuation. Depreciation reduces taxable income but does not reduce cash. Depreciation is recorded by debiting depreciation expense and crediting accumulated depreciation. There are several methods of computing depreciation: Straight-Line Depreciation, Units-Of-Production, and Accelerated Depreciation methods (e.g., Sum-Of-Years'-Digits and Double Declining Balance). Depreciation expense is deducted by a business on its federal income tax return. The depreciation amount on the tax return, however, may differ from the amount reported in the firm's income statement. In fact, the method used on the tax return need not be the same method used in the financial statements. Typically, a firm uses an accelerated depreciation for tax purposes and the straight-line method in its financial statements. Accelerated Cost Recovery System (ACRS) is a system that allows a specific accelerated write-off pattern of the asset for tax purposes.